Monday 18th December 2006
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They will see Infratil place its own shares to other investors and increase its stake in TrustPower to 50.5% from 35%.
Infratil is paying about $445 million for Alliant. It has already arranged to sell 14 million of the TrustPower shares to the Tauranga Energy Consumer Trust for $5.90 a share, or $82.6 million, and placed a further 12.35 million TrustPower shares at $7 a share, or $86.45 million.
It also arranged to sell the 11 million Infratil shares it acquired from Alliant and 2.48 million shares of treasury stock through a placement at $5 a share, or $67.4 million. In mid-November, Forsyth Barr analyst Rob Mercer estimated the transactions added $70 million, or 27 cents a share, to Infratil's net asset value, raising his valuation to $5.73 a share compared to the then $4.90 share price. Since then, Infratil's shares have risen as high as $5.30 while TrustPower's shares have risen as high as $7.95.
Sharechat: Given all the value you've added to the company just in the last couple of months, why do Infratil's shares still trade at such a discount to net asset value?
Infratil managing director Lloyd Morrison: If (the stock) it's going to be re-rated, it's something that will happen over time. If you read most of the analysts' reports, they're all still recommending that we trade at a discount. Most of them are saying the discount's lower than it's been for quite a long time and maybe it should be sold off. I think what happens now is we need new investors to look at it and say, actually, we don't agree with that. If they deliver as they have delivered over the last 12 or 13 years, they're clearly beating their cost of capital and they should trade at a more appropriate level which would be at a premium to our NTA. Another thing a lot of analysts haven't looked at is that a lot of our businesses have optionality in them. The valuation of an option isn't based on NTA it's based on its potential upside.
SC: What do you mean by optionality?
LM: An option is usually an opportunity to pay a higher price than the current price in the short-term without committing to that price. We buy businesses that don't cost us too much but where we can quantify the downside of those businesses but where they have unlimited upside. In Australia, on the retail energy side we've only spent about $15 million to establish it. It's worth more than that already. Origin recently paid $1,000 a customer. We will have 150,000 customers by 31 March in Victoria Electricity. We only own 58% of that business. We will have to negotiate to buy out our partners at some time over the next 12 months. Even if you value customers at $500, we've clearly made a substantial amount of money. Every analyst's report I've seen values Victoria Electricity at $15 million. They even ignore that of that $15 million, probably two-thirds of it is on deposit as security for our energy trading position which required by the regulator over there. The key point is we invested a small amount of money and we may well have lost it. Buying Kent (airport) is a good example. We paid 17 million pounds and we will spend another 10 million to 20 million pounds on it. If it doesn't work out, we could lose 40 million pounds. If it does work out, it's not going to be worth 40 million pounds, it's going to be worth many more times that. That's what we call optionality. The downside is measureable. If you buy an option on the market, it's not got nothing to do with NTA. It's really about looking at what the potential value is. I think we may shake that off over time, if we keep performing. (There are people who see) the glass is half full and (those who see) the glass is half empty. What we need us to get more of the half full ones. A number of the people who analyse us are the glass half empty people. A number of analysts who are very smart people rate us as a hold and they've rated us as a hold every time they've rated us in the last five years. Eventually they will be right. The criticisms of us are credible and fair. They might not be right and they haven't been right in the past, but they might be right this time. It takes different views to make a market.
SC: You seemed to have no difficulty finding buyers for the Infratil placement last month. I've heard the whole lot went to offshore investors. Is that correct?
LM: Yes. We haven't raised any equity since 1996. We're not looking at raising capital but we do know if we keep delivering - the market cap of the company now is about $1.2 billion. If we keep performing at 20% per annum with some overs and unders, then inevitably the market cap will grow. That's just the by-product of performance. To go from $1 billion to $2 billion is going to need the involvement of new investors and the New Zealand market isn't sufficient. What we've done over the last 12 months is put effort into introducing ourselves to those target (offshore) investors. The problem is New Zealand's not a primary market for them. We're only going to be a small part of their portfolio. The liquidity of Infratil is still quite low. The placement offered an opportunity to get some people started who had an interest from offshore who wouldn't otherwise. They wouldn't sit and build a position, they would just ignore it. The advantage of the placement was we were able to seed some people. We didn't satisfy anybody's demand but we were able to give offshore people sufficient stock that they can build from that position. Our experience with offshore people is very different from dealing with New Zealanders. When you say you've done well over the last 12 years, most New Zealanders will say, that's great, you've done very well but your luck must be coming to an end. Foreigners look at it very differently. They see a track record as a guide to what's to come. We've found we've had an extremely positive reception from offshore people. They say, you're in a space we're interested in and you've got a track record that's as good as or better than most. Then they say, well you're too small, but it's a very different attitude to our track record. Those people ultimately will impact on the price, provided we continue to deliver.
SC: What is the value to Infratil in owning just over 50% of Trustpower rather than 35%?
LM: We were very happy to own 35%. We never took an initiative to go to 50%. In fact, we tried to talk Alliant out of selling. Buying it was as much a threat as an opportunity. We very much support the company. We believe it's in the right space. We think the management is excellent and the board is harmonious. The strategy is good. We didn't want that disrupted. The advantage of buying it is we don't have somebody with a different agenda. It lowers our cost of capital. A 35% holding from a banking perspective, a lender's perspective, is nowhere near as good as 50%. There was no advantage in having between 35% and 50%. Likewise, there was no advantage to us having more than 50% which is why we sold down. At 51%, we consolidate TrustPower. We have better, larger and cheaper banking options as a result of going from 35% to 50%. Our borrowing costs have gone down by half a percentage point simply because we have a more secure position of ownership.
SC: Why did you decide to divest the Port of Tauranga stake completely? Isn't there further upside available from its merger with Ports of Auckland?
LM: We had already sold down from 35%. It had been part of a process that had been going on for quite a while. We sold at the time because we had set a target. It had been a gradual sell-down. It wasn't anything to do with the merger. We sold down as soon as we won the TrustPower deal. It wasn't anything to do with a view of the future of the port or the merger.
SC: The Star Alliance says Wellington Airport is one of the most difficult and most expensive to deal with in the world. What's your view?
LM: That's just garbage. The Star Alliance is like ... their people move around from place to place and they're like talking puppets on behalf of their component airlines. Most of the Star Alliance have no experience of Wellington airport. They just don't know. There's plenty of comparative analysis that shows we're not the most expensive or the most difficult.
SC: You seem to think Air New Zealand is over-charging for domestic flights? You have commented on how much prices have gone up and compared current prices to pre-express model prices.
LM: I don't really want to add to those comments at the moment except to say I really would like Air New Zealand to succeed, as a New Zealander, as a business person. I'm extremely supportive of Air New Zealand being successful. The fact that we have different opinions on some issues shouldn't be seen as anti Air New Zealand because it's absolutely, categorically not. They sometimes portray us as being anti Air New Zealand success, but that's not correct. We believe they can achieve their results in a way that can be just as successful without damaging growth opportunities for the market. For example, we've said for three or four years, if not five years, that they should be growing their low cost business, their Freedom Air model. We believe that strategically there's an opportunity for them and that they should be seeing the market as different for long haul and short haul in the way Ryanair has demonstrated. It doesn't make sense to serve both markets with one brand. Our view is that Freedom Air should have been rolled out three or four years ago as their short-haul brand. Likewise, we would see Whenuapai not as a threat but as an opportunity. It would be sad for us if Air New Zealand doesn't take that opportunity. We're absolutely sure somebody will. We have fundamentally different views but they're only differences on what would help Air New Zealand succeed.
SC: Why have Glasgow Prestwick's freight volumes turned around? I thought the decline was structural in that industry was moving out of Scotland.
LM: That has been the case, but ultimately, as the White Paper looking into the future of UK airports said, regardless of those sort of issues, in the long term Prestwick will be a successful freight airport. It's the only one of sufficient size north of Manchester that can take large freighters. I guess we've bottomed and we've started to turn around. We will just have to see that the trend is maintained. We don't know what's going to happen on a month by month basis.
SC: The Kent airport seems to have been particularly successful in attracting freight volumes. Why? Isn't building freight the key to that airport?
LM: We will get passengers eventually. It could establish itself as a London airport for freight. It's showing some very good early signs, but it's early days. The weakness for the airport is it doesn't have enough airlines, but the ones it has are growing their business very quickly. It's already well ahead of where we expected it to be a year after buying it.
SC: What did you mean in the first-half report that Lubeck airport "may not be as constrained by its existing development consents as originally thought"? That's a much smaller airport than the other two isn't it?
LM: It is but it has a much larger catchment area. It's within an hour of 4.5 million people. In Wellington, there's only 500,000 people. It will never have freight, it will only have passengers. Historically, it's been very dependent on an extension of the runway. What's apparent to us now is some carriers are using different aircraft that don't need that extension.
SC: When do you expect Infratil's European airport operations will start making a positive contribution?
LM: We don't have a specific date, but it's something that we think about a lot. We're very aware of how hard it has been to turn around and the amount of resources that's been required, the effort required and how long it takes, but we're very confident we're getting it right. It really is hard, slow work. You have to be patient at the same time as working with quite a lot of optimism. We're sure we will get there.
SC: You're obviously frustrated at the public transport situation in Auckland and Wellington. What do the councils need to do to improve public transport?
LM: What they seem to be focused on is what sort of model they want for public transport, what are their terms for transport providers. There are about five or six different regulatory authorities trying to decide prescriptions for public transport. We've had a significant oil shock and a lot of people looking at using public transport and the capacity hasn't been there. One of the reasons we invested is we believe it had significant growth potential and we had the capital to grow it. We would like to be ordering literally hundreds of buses but we can't do that if the regulatory providers aren't happy to give us at least some certainty about our position. We run on contracts and most of the contracts we're involved with at the moment are in abeyance. They're rolled over on a short-term basis. We can't invest. In the meantime, the oil price has come back and the ability to convert a lot of people has been lost for a period of time. We're hopeful people will eventually allow us to move forward. All the government objectives and the regulators' objective are to grow public transport and we agree with that.
SC: Why does Infratil want the Mana coach business so much? Isn't the process using up too many resources?
LM: It's a sensible acquisition. We particularly like the people there. We don't believe it's a competitive problem for the market. It's not such a big an issue. We just treat all our businesses seriously. When the Commerce Commission took us to court, they spent a lot more money on resources than we did and brought in experts at a far higher level and a far higher cost than we thought was necessary for such a small business. We did as we always do in all our businesses. We put our case as best we could. Why are we appealing it? The answer is simply that we believe the judge got it wrong. it's not that we're putting in disproportionate resources. I think the Commerce Commission is doing a got job generally, but they're not always right. All we're doing is ensuring our case is propertly heard and impartially heard. You're right if you look at it, if we don't win the case, is it a big deal for Infratil? No.
SC: How do you see Infratil Energy Australia developing?
LM: I'm really excited about it. I would say that's probably the next big growth business for Infratil. We know the Australian market really well. We've been there a long time. We have what I would call a road map. What's important in energy markets is that it's very connected. The price of gas, the price of coal, the price of transmission, transmission constraints. All these things are connected. You can't get involved in energy markets without understanding that connectivity. We're able to assess opportunities with a good understanding of the wider market. We've got some very good people over there. We're piecing together bits of generation. We've got about 70 megawatts now. That could be between 100 and 200 megawatts by this time next year. We started Victoria Electricity from scratch. It wasn't material but it's starting to become material. It has electricity and gas customers and it's stared in South Australia recently. It will become a retailer in New South Wales and Queensland over time. In the long term, it's not inconceivable that we could have between 250,000 and 500,000 customers. In the short-term, we've done it in partnership with two good executives, New Zealanders operating over there. Our agreement is that we have to negotiate to buy them out next year and they will make very good money out of it. We own 58% at the moment. In the context of Infratil, it will become a lot more important and it will be impossible for analysts not to estimate its value.
SC: Given that there are now so many players internationally in the infrastructure area now, how is Infratil going to be able to find suitable growth opportunities?
LM: The same way it's always done. With the TrustPower deal, we had to fight off quite a few people from Australia. With the Stagecoach deal we took on some private equity people. The difference between us and the private equity people and the infrastructure funds is that we actually run the businesses. We start them from scratch as we've done in Australia. We're not driven by funds under management. We're happy to look at smaller deals such as Kent. It costs us a lot from a management perspective. We don't rely on refinancing to fund our deals. We would rather grow a business and invest in it. There are lots of opportunities. They are hard because they're in offshore markets. We still find ways of making mistakes but overall we're better than we've ever been before. We've got good executives and good market positions.
SC: Didn't you have a pre-emptive right with TrustPower?
LM: In some circumstances we've had a pre-emptive right and in other things we didn't. (With TrustPower), we made it very clear to outsiders that we would refuse to meet with anybody. We made it very clear we intended to take up our pre-emptive rights and that we regarded anybody coming in as hostile. We weren't interested in anybody coming in and disrupting the company's future. Prickly would be a good way to describe us. It didn't fall into our laps. We had to work quite hard to get it.
SC: Why is Infratil investing in a junior oil and gas explorer? Isn't that getting away from the company's core expertise?
LM: A look-see would be the way to describe it. We've been quite impressed with the way people like Todd have been able to look across the whole sector. It's not an area we know very well. I think there's quite a bit of optionality. We put in an amount of money we can afford to lose and we will see how it goes. In the context of Infratil with $2 billion of assets, $20 million isn't a lot of money, which is not to say we're not taking it seriously. It's no more than a look-see.
SC: Seeing you decided to invest in that sector, why pick Austral Pacific to invest in?
LM: Because it's got pretty good acreages. Our view is that Cheal and Cardiff look to be quite prospective. They've got some opportunities that look good. Our interest isn't offshore, its local onshore. They're well placed from that perspective.
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