Canadian Teachers Take A Ride Along Macquarie's Tollways
Sydney Morning Herald
Monday February 24, 2003
Their fund has invested more than $1 billion, writes Brian Robins.
At close to $800 million, it is the biggest fundraising so far this year, as Macquarie Infrastructure and Transurban fund their portion of the equity of the $2.23 billion Western Sydney Orbital tollroad.
After flooding the market with scrip over the past few years, Macquarie Infrastructure did a quick deal with Ontario Teachers' Pension Plan, raising $392 million via convertible notes.
That boosts to well over $1 billion the exposure of Ontario Teachers to the airport and tollroad arms of Macquarie Bank, making the Canadian fund one of Australia's largest single foreign investors.
From a failed bid for Canada's 407 tollroad with Macquarie in 1999, Ontario Teachers has emerged as the largest player in Macquarie's investment funds.
The first plunge was a stake in Macquarie Airport Group, the unlisted ?600 million ($1080 million) fund, which was followed by a $200 million placement of shares in Macquarie Infrastructure Group at $3.25 a share in March last year. Ontario Teachers has since topped that up to to more than 6 per cent of Macquarie Infrastructure's capital. Sydney Airport followed, and last month it took a direct slice of equity in the listed Macquarie Airports.
Macquarie has found it tough to find foreign investors. The only other offshore player of note is Abbey National, the UK bank, which has a stake in the unlisted Macquarie Airport Group along with Sydney Airport, although it is off-loading non-UK investments.
Indicative of Macquarie's difficulties in finding patient investors for big infrastructure projects was this week's deal with Ontario Teachers for Western Sydney Orbital. The notes carry a deep 7.5 per cent discount when they are up for conversion in five years.
``A 7.5 per cent discount is probably too steep," one senior analyst says. ``Around 2.5 per cent would be understandable, maybe even 5 per cent, although even that is steep."
Ontario Teachers reckons it got a good deal.
``We've drawn a bargain on this commensurate with our risk," says Leo de Bever, senior vice-president research and economics at Ontario Teachers, who is responsible for the push into infrastructure funding.
Macquarie Infrastructure's issue of notes to Ontario Teachers which would convert to around 10 per cent of Macquarie Infrastructure's capital if no more shares are issued was not offered around the market, since the tollroad investor was wary of the poor reception from local institutions, although as Transurban is finding, demand for these types of instruments among local investors is quite robust.
Conversion of Ontario Teachers' notes would also water down Colonial First State's stake below 10 per cent, following its big selldown last year to 12 per cent of Macquarie Infrastructure's capital from more than 20 per cent at one stage.
Western Sydney Orbital is expected to be operational by mid-2006 six months ahead of schedule, resulting in bonus payments all round.
But what is to stop Macquarie Infrastructure from issuing more scrip which would water down Ontario Teachers' notes?
A shareholder revolt last year forced Macquarie Infrastructure to swear off pursuing new acquisitions paid for by scrip issues.
``It has issued a lot of stock along the way," de Bever says of Macquarie Infrastructure. ``They are restrained in what they can do, and we've made it fairly clear we will protect our interest."
Macquarie Infrastructure has told investors it will not be issuing more shares anytime soon, in the wake of last year's hefty round of issues.
Even so, it has its eye on buying further equity in 407 when standstill agreements on their sale expire in 12 months. Elsewhere in North America is also enticing as more projects come forward, although activity so far has been subdued.
Ontario has taken the view that prospective returns from the sharemarket for the rest of the decade will be muted, running at around 4 per cent plus dividends.
So, with share price gains likely to do little better than mirror earnings growth, Ontario has moved to boost direct investments, taking up equity in a number of Macquarie funds and punting in local hostile takeovers for the likes of Canadian coal miners, amid a host of other corporate plays.
``Why [Macquarie is] attractive is that we have a very heavy concentration in private capital and mostly high end of risk-return company restructurings with high risk and high returns," de Bever says.
``We realised that there was an opportunity on the bottom end of the risk end, in regulated assets transmission systems or toll roads, with long-term contracts or returns within a regulated regime.
``We've discovered it is very labour intensive and you need to know what you are doing."
With $C68 billion ($76 billion) under management, Ontario Teachers' exposure to Macquarie's various funds is small, but it marks a convincing break with traditional investment patterns.
``We have our bones to pick from time to time," de Bever says of Macquarie.
Asked about Macquarie's efforts to maximise its take from transactions on its plate, he says: ``We push back fairly hard.
``They look out for number one, and every organisation does that. They are no different to KKR [Kohlberg Kravis Roberts & Co, the US buyout fund], Goldman Sachs one thing that makes them rapacious is that incentive fees are very large."
It has only been in the past few months that some US fund managers have begun to take positions in Macquarie Infrastructure, following a partial reversion of the US dollar's strength and the Australian dollar's extreme weakness.
``The fact that they are based in Australia is almost a liability now," de Bever says of Macquarie's ambitions. ``We've been looking at infrastructure for a couple of years. There are very few organisations in this area and very few companies investing in infrastructure.
``The reason we hit on Macquarie is that in a global industry it is one of the key players. Another key player globally is Capital Partners."
Ontario Teachers is not shy about taking big licks of stock, and was listed as holding 4.5 million shares in ANZ and 1.2 million shares in NAB in its most recent annual report.
Another large deal was the $C850 million Altalink transaction in mid-2001 for the purchase of the bulk of Alberta's electricity transmission system.
Macquarie set up the deal, taking 15 per cent of equity. Ontario took 25 per cent.
Macquarie is using its stake in Altalink as the seed asset for a $C250 million fund being finalised in North America, which is expected to focus on electric transmission and pipeline assets.
Ontario Teachers will not invest in this fund. Nor is it involved in Macquarie's bid for the $815 million Lane Cove tunnel, which seems in doubt after institutional investors blocked Hills Motorway's participation.
Before the Western Sydney Orbital deal, Ontario Teachers put its total global exposure to infrastructure investments at $C1.7 billion. Its exposure to Macquarie accounts for about half that total.
``[Ontario is] a believer in the sector [its] monopoly characteristic and the long-dated nature of the assets," says Macquarie executive director Nicholas Moore. ``It is a pension fund, so it is looking for secure, long-term income streams with inflation protection."
But despite its optimism about infrastructure, performance of Ontario Teachers' Macquarie exposure is indifferent at best.
Shares taken up in the Macquarie Infrastructure placement at $3.25 a year ago are still trading at around this level, and Ontario is underwater on Macquarie Airports shares bought last month in the sell-down by Macquarie Bank at $1.15 a share. On Friday they closed at $1.04.
And it will take time for the unlisted Macquarie Airports Group and Sydney Airport to gain traction.
As for Western Sydney Orbital, this not one of Macquarie Infrastructure's best assets. ``Macquarie got a tollroad that is probably not the best performer in this field," de Bever says.
``Two projects stand out one is outside my door [Highway 407] and the other
is in Birmingham, England. And Macquarie has both of them."
ONTARIO TEACHER'S AUSSIE LINK
COMPANY % STAKE MARKET
VALUE
MIG 6.06PC $350M
MIG NOTES $392M
MAG * *
MAP 5PC $47M
SYDNEY AIRPORTS 5PC $280M
* SIZE OF STAKE AND VALUE UNKNOWN.
© 2003 Sydney Morning Herald