MRE: MIG: Further Update on the French Toll Road Acquisition

Shares in Macquarie Infrastructure Group (MIG) have rallied over 3% since Wednesday, following yesterday’s announcement that MIG, along with Eiffage and MEIF, has been successful in acquiring the French Government’s 70.2% stake in the APRR. The consortium has a combined stake of 74.7%, and will now make a bid for the residual shares at €EUR61 per share, the price paid to the French government. Despite MIG providing limited details of its assumptions for APRR, given it is now entering a takeover bid, Macquarie Research Equities (MRE) believe that the acquisition is attractive, not just from an asset price perspective but also, importantly, from a cash perspective. MRE have an Outperform recommendation on MIG with a 12 month price target of $4.52.

APRR is the second largest toll road operator in France and the third largest in Europe. It currently has 2,205km of road in service, comprising 1,821km in the APRR network and 384km in the AREA network. A further 11km is under construction with a total of 55km of new road to be completed by 2011. In 2004 just under 20bn vehicle km were travelled on APRR’s total network, generating toll revenue of €1.5bn.

The group’s main network covers the area south west of Paris, linking the cities of Paris, Lyon and Dijon with the areas of Burgundy and central France through to Northern Europe. The APRR network lies in the southwest alpine region of Rhone-Aples.

The bid price values APRR’s equity at €6.9bn. Combined with transaction costs and the discount at which the consortium acquired the Eiffage’s APRR stake, the total bid cost to the consortium is
approximately €7.0bn.

MIG has indicated it will fund the equity requirement via underwriting the next two DRPs. Given the dividend of 21¢, underwriting the issue will retain $503m, 83% of the required amount. The residual can be funded from MIG’s cash balance. Post the issue, MIG will still have more than A$1bn of balance sheet flexibility to acquire assets in the US.

MRE believe MIG will use the surplus 4–5¢ per share to lift the dividend quality – 86% of the dividend is now covered by dividends from underlying assets, up from 68%. Net of fees, it will increase to 62% from 44%. The improved quality allows MIG to recycle more refinancing proceeds into share buybacks (if it becomes legal) and new opportunities in markets such as America.

MRE believe the bid price is reasonable. The deal is estimated to generate an ungeared internal rate of return (IRR) of 6.5% post tax. This is well above what MRE believe would be the mature road risk premium of 5.5%. Thus the acquisition adds value. The leverage simply ensures the amount of equity required to capture this value add is reduced, and as a consequence, the IRR goes up. As a side effect, the impact of a change in growth assumptions is more significant, with interest rates being the most significant. Thus, in MRE’s view, for MIG shareholders, APRR is likely to be the best performing asset in its portfolio on an IRR basis.

MRE maintain an Outperform recommendation on MIG with a 12 month price target of $4.52.