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FNZC trims Infratil's target price on $3.4B Vodafone deal

Wednesday 15th May 2019

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First NZ Capital has lowered its target price for Infratil shares after the infrastructure investor flagged plans to make a $1.03 billion investment in Vodafone New Zealand. 

Multinational telco Vodafone Group has agreed to sell its New Zealand unit to a consortium comprising Infratil and Canada's Brookfield Asset Management for an enterprise value of $3.4 billion. Each partner will take a 49.9 percent stake for $1.03 billion each. Vodafone NZ will also take on $1.3 billion of debt. 

Infratil's shares were halted last week when news of a deal started leaking. When they resumed trading they fell as much as 6.1 percent before closing yesterday at $4.48, down 2.6 percent. The shares were unchanged at today's open. 

FNZC analysts have trimmed their view on where they think Infratil's shares will be in 12 months as a result of the Vodafone deal. They kept their 'neutral' rating on the stock.

They lowered the 12-month target price by 3 percent to $4.23, which was based on the addition of Vodafone to Infratil's portfolio, including the debt taken for the deal and the increased management fee for HRL Morrison & Co. 

Infratil will pay for its share by raising up to $400 million of new equity, draw down existing debt and tap a $400 million acquisition facility. 

FNZC said the $3.4 billion price is at an implied enterprise value to earnings before interest, taxes, depreciation and amortisation of 6.9 times-7.4 times, a range similar to the recent trading multiples for Spark New Zealand. 

"Post-acquisition, Vodafone NZ’s gearing of 2.9 times net debt/ebitda seems reasonable. Once the Infratil parent acquisition debt is counted, this appears highly leveraged at 5.5 times net debt/ebitda," it said. 

"The key downside risk to our neutral recommendation and our $4.23 target price is the manager’s ability to continue actively targeting growth infrastructure assets beyond the existing portfolio," it said.  

FNZC noted the acquisition will increase New Zealand assets to 62 percent of the total Infratil portfolio but "management has indicated that it does not see Infratil as overweight NZ Core, and therefore there is no need to sell down TPW or Wellington International Airport." 

Nearly half its portfolio is currently held in the listed energy companies Trustpower and Tilt Renewables. 

A forced divestment of Trustpower's retail business doesn't seem necessary at this point, FNZC said. 

It notes the transaction is conditional on Overseas Investment Office and Commerce Commission clearance, both of which are expected to be granted. 

"OIO approval is highly likely to be granted given that the transaction effectively increases NZ ownership of Vodafone through Infratil.

"The issue for the Commerce Commission is whether this substantially lessens competition — the crossover is in the fixed broadband market where Vodafone has 26 percent market share and Trustpower 5 percent. We see this as unlikely to cause issues," it said. 

Infratil owns 51 percent of Trustpower which now offers broadband and phone services and which will this year start offering mobile and fixed-wireless broadband services through a partnership with Spark New Zealand.

In a statement yesterday, Infratil said that, given the competitive nature of the fixed broadband market, it believes there is a "strong basis" for clearance.

It acknowledged, however, "if Infratil cannot obtain Commerce Commission clearance, the acquisition agreement would require Infratil to divest its interest in the Vodafone transaction, or failing that divest its stake in Trustpower by the eight-month deadline. The Commerce Commission clearance condition could also be satisfied if Trustpower had sold its retail business in the required time."

Regarding other risks, FNZC noted the management agreement with HRL Morrison & Co creates an agency risk. Other risks include inflation, exchange rates, interest rates and contracting and execution risk at Canberra Data Centre, and regulatory risks in several jurisdictions, it said. 


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