Monday, November 27, 2006

U.S. infrastructure liquidation sale in the works

Road to riches opens for Mac

November 27, 2006

David Nason and Robert Clow
The Australian
Copyright 2006

A UBS report commissioned by New Jersey Governor Jon Corzine has recommended that three of America's busiest toll roads be privatised, potentially creating massive opportunities for Macquarie Bank and other Australian infrastructure investors.

Chief among the three is the 250km New Jersey Turnpike, which Macquarie officials previously valued at around $US20 billion ($26 billion).

Macquarie's listed toll road vehicle Macquarie Infrastructure Group and Spanish partner Cintra Concesiones have already spearheaded the push into US toll road privatisation by buying the Chicago Skyway for $US1.8 billion and the Indiana Toll Road (ITR) for $US3.85 billion.

But the Jersey Turnpike has long been seen as the jewel in the crown of the US toll road opportunities.

The report divided the New Jersey assets into three tiers based on the viability of privatisation. The two other "Tier One" highways were the Atlantic City Expressway and Garden State Parkway - the next two largest highways in the state.

UBS also recommended that the cash-strapped state, which has $US30 billion in debts and nearly closed for business soon after Governor Corzine took over, consider selling its lottery commission and major transit stations.

UBS said these assets could be quickly sold or leased, and would deliver the state an "attractive" or "very attractive" return under so-called public-private partnership arrangements.

At the Merrill Lynch Australian investment conference in New York in September, MIG chief executive Stephen Allen said the company would definitely be interested in the New Jersey Turnpike if it became available.

He said the US had the potential to become a "massive market" for MIG. "We think the US is going to be the biggest market in the world for what we do," he said at the time.

Macquarie Holdings director David Gribbin, a former chief counsel for the US Federal Highway Administration, told the American College of Bond Counsel last month that he expected 16 to 25 toll road concessions, worth more than $US80 billion, to be opened up in the US over the next two years - six to 10 of them in 2007. Credit Suisse analysts have previously estimated that existing US toll roads worth a total of $US250 billion could be privatised in coming years.

MIG, whose annual general meeting takes place today, may not be the best placed to take advantage of the emerging opportunity, which could require it to raise a substantial amount of equity at a time when the company has lost favour with investors.

Investors pummelled the stock after MIG reportedly paid $US1 billion more than its closest competition to buy ITR.

Subsequently, MIG has gone through a period of frenetic reorganisation, partly prompted by the suggestion that Macquarie could be ousted as the fund's manager.

MIG spun off its mature Australian toll roads into the Sydney Roads Group, sold half of its four US toll road interests to unlisted US fund Macquarie Infrastructure Partners and initiated a share buyback scheme.

At the same time the toll road company initiated a moratorium on new deals, promising to focus on the performance of its existing roads.

From a low of $2.61 in July, the shares recovered to $3.48 at the end of last week.

The moratorium may not matter for the Jersey deals, which will take a long time to incubate.

Macquarie's unlisted US vehicle, Macquarie Infrastructure Partners, will play an important role in any future Macquarie toll road acquisitions.

Aside from the fact that Macquarie is increasingly favouring unlisted funds, MIP was set up partially as a lead US-domiciled investor to get around nationalistic concerns about selling US roads to foreigners.

Mr Allen said that he ran into significant nationalist feeling when MIG was buying the ITR.

It is also possible that Macquarie will be outflanked in all the new deals. Since MIG gobbled up the Skyway and the ITR, rival infrastructure funds have proliferated at a frightening rate for the trailblazing Australian bank.

Goldman Sachs, the Carlyle Group, Credit Suisse, General Electric and UBS are among the newly arrived players in the space.

© 2006 The Australian: