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The Shoeshine Column: Merge or die for Infratil Australia

Friday 14th April 2000

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Directors need to find a more generous partner than AIF

Australian Infrastucture Fund's takeover offer for Infratil Australia has all the hallmarks of a blatant try-on. It has little chance of success but it puts the spotlight once again on the underlying issues that have dogged Infratil almost since it was set up.

Due - in part - to the offer of two "stapled securities" for five shares, Infratil's share price has spiked up to a level not seen for more than a year and some shareholders will no doubt want to take the opportunity to bail out.

They would be well advised to do so on-market rather than by accepting the AIF offer. That's because the offer is conditional on acceptance by the holders of 90% of Infratil's shares.

That puts Australia's Alliant Energy, with a 10% holding, in a position to torpedo the offer outright - and it probably will.

Alliant appeared on the register only last October, paying 95Ac a share for a 33.8 million share placement as part of a "strategic alliance" with Infratil.

The nature of its interest became clear a week later with the announcement Alliant, investment fund UniSuper, and Infratil had bought Contact Energy's 27.7% stake in Victorian generator Southern Hydro.

True, AIF has energy investments too which, the Aussie outfit contends, will complement Infratil's Southern Hydro holding in a merged portfolio. But Alliant got involved only for the opportunity to get into Southern Hydro and it is doubtful it will be keen to see its exposure diluted.

AIF's bid is cheeky given it has gone public with an offer already rejected by Infratil's board in "private" discussions. Things had probably gotten pretty shirty at that time because somebody saw fit to leak the negotiations to the Australian Financial Review. When the talks ended last Friday Infratil felt the need to inform the market AIF's offer was inadequate, indicating it knew AIF would go ahead with a public offer.

Since then the two have become embroiled in a war of statistics. AIF argues, based on Friday's $A2.16 closing price for its securities, the offer values Infratil shares at a 35% premium to the weighted average market price over three months to March 9.

Infratil reckons the premium is only 12% over the average for three months - to April 6. Worth 78Ac a share, the bid is as a matter of fact at a 12% discount to the April 6 closing price of 89Ac.

In short, the two have chosen the valuation periods that present the offer in the best, and worst, lights.

Until March 9, when it hit a low of 63Ac, Infratil's share price had been in steady decline for more than a year.

A string of announcements since have seen it jump. On Monday it finished at 85Ac, a rally of 35%.

Part of this was due to the AFR leak, which - whoever was responsible - did no good to AIF's cause.

The rest was down to the announcement of various initiatives designed by the Infratil board to attack what it sees as the huge discount a heartless market places on its shares. The moves raise questions in themselves but there is no doubt they have helped boost the share price.

First, on March 9 Infratil announced it would buy back 17.4 million shares, or 5% of its capital, because "the best investment the company can make at this time is an investment in its own shares."

On March 24 it confirmed it would sell stakes of 20% each in Perth Airport and Northern Territories Airports.

To some, selling assets might seem an odd way of getting the market to recognise the value of your portfolio. Infratil's rationale was the 30% holdings with which it will be left are no less strategic than 49.5%. Selling down will confirm the value of the remaining shares, realise a profit, and release funds for other investments.

Given the bullish forecasts Infratil has made for Perth Airport this looks like a strategy that favours short-term expediency over long-term value creation. Nonetheless, the market bought it.

Then on April 6 - the day before rejecting AIF's behind-closed-doors offer - Infratil expanded the buyback to a maximum 30.4 million, or 9%, of the shares. Between the two buyback announcements the shares had already completed their 35% rally.

Cynics will suspect the real motive for lifting the buyback was to push the share price up further still, making AIF's forthcoming bid look stingier. If so, it didn't work.

Infratil's board will presumably argue, despite the rally, the shares were still "the best investment the company can make" with the cash released from the airports sales.

That shows it still doesn't understand why the market isn't interested in the shares.

The success of Infratil's sister company, Infratil New Zealand, lies in it operating in a much smaller market. It can afford to take strategic stakes in a meaningful range of companies, affording investors a diversified infrastructure play.

The Australian outfit, with total assets of $A366 million before the airports sales, is too small to do the same. Using the sales proceeds to buy back shares will do nothing to enhance the spread of the portfolio. Investors who want exposure to seaports, airports or generators can choose from a wealth of listed companies in Australia and New Zealand.

A merger with AIF would have delivered the scale Infratil needs to attract investors' attention as a diversified infrastructure play. Directors may be right to reject the offer as stingy but until they find a more generous marriage partner the discount will stay.



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