AU, Asciano was doomed by a flawed model
Chris D
Bryan Frith | March 17, 2009
Article from: The Australian
ASCIANO is starting to look like a runaway train.
It's been all downhill since the company was formed almost two years ago
after a demerger of the ports and rail businesses of Toll Holdings in the
wake of that company's takeover of Patrick Corp. Toll decided on the
spin-off as an alternative to honouring an enforceable undertaking to the
competition watchdog, ACCC, to sell off 50 per cent of the Pacific National
rail freight operation.
Asciano was conceived as a high-yield business, paying distributions greater
than earnings -- which the global financial crisis has shown is a flawed
infrastructure model. So Asciano was loaded with debt of $5 billion, leaving
Toll virtually debt-free.
It was obvious after the global credit markets seized up near the end of
2007 that Asciano's debt level was unsustainable and the company's share
price, which opened at $10.65 when Asciano joined the lists in mid-2007,
began to slide.
By mid-2008 the share price was down to around $3.50 when the private equity
group TPG and Global Infrastructure Fund came up with an indicative cash
offer of $4.40 a share, with a scrip alternative of unlisted securities in
the bidding company, which would have catered for shareholders who were
prepared to stay in for the ride as co-investors.
Asciano at the time had been considering ways to reduce the crippling debt
burden, including the possibility of a discounted equity raising of up to $1
billion, but had abandoned that option because of the steep fall in the
share price.
The TPG-GIP proposal capitalised Asciano at $2.8 billion and, together with
the $5 billion of debt, an EV (enterprise value) of $8 billion. But the
Asciano board considered that $4.40 a share undervalued the company and
would not agree to due diligence.
JPMorgan was brought in to advise Asciano.
It's suggested that chairman Tim Poole was instrumental in the rejection,
perhaps in the expectation that TPG-GIP would come back with a higher offer.
There are suggestions that CEO Mark Rowsthorne had encouraged TPG-GIP to
make an offer and that the rejection caused a fracturing of relations
between the CEO and Poole.
Soon after, Asciano came up with a compromise solution: to look at selling
off, or "monetising" parts of its operating businesses, or issuing
securities convertible into equity in the business, and set up a process to
seek offers from interested parties. ABN AMRO was brought in to advise on
the process.
If the talk is right, JPMorgan didn't think much of that strategy,
considering that the sale of minority interests in the operating businesses
would be unlikely to raise enough to resolve Asciano's debt problems,
particularly as the economic outlook was weakening and therefore likely to
depress the amount that potential buyers would be prepared to offer.
Seven months later, JPMorgan has been shown to be correct. Asciano has
dumped its strategy of selling minority stakes and is now prepared to sell
entire businesses, and will even consider a change of control transaction
(takeover) and/or a recapitalisation of the group.
Asciano is trying to dress it up as an extension to the scope of its
monetisation process, claiming it is in response to "multiple" expressions
of interest from a range of industry and financial parties in relation to a
variety of financial transactions. But in reality it smacks of desperation.
When Asciano began its monetisation process it had some time up its sleeve.
It didn't face any debt repayment until May 2010, when $2.25 million of the
debt facilities mature, with the remainder repayable two years later.
But the lack of progress since then adds a degree of urgency. In a few weeks
the $2.25 billion will be repayable within 12 months and become a current
liability. Asciano doesn't have the luxury of a further six months or so for
its expanded monetisation process; instead, its objective is to announce a
transaction by the end of June, only a little over three months away.
Initially, Asciano was looking at selling a minority stake in its Pacific
National rail operation, but that wasn't attractive to potential overseas
buyers, which were used to rail operators owning the railway line, which is
not the case in Australia.
So the main effort switched to seeking to sell minority interests in the
port and coal operations.
It's understood that the main interest in the now abandoned partial
monetisation strategy came from the Future Fund and Queensland Investment
Corp, but, for whatever reason, they have now gone away.
Asciano now says it will consider the sale of up to 100 per cent of either
its coal or container ports businesses, proposals in respect of other assets
and businesses, and proposals that would result in a change of control
and/or a recapitalisation.
Whether or not it's a case of shooting the messenger is unclear, but
JPMorgan is no longer involved as an adviser. Instead ABN AMRO has been
joined by Lazard Carnegie Wylie to advise on the expanded process.
Carnegie Wylie advised Toll on the Patrick takeover, but was not involved in
the demerger of Asciano.
Asciano's share price rose to $4.83 on news of the approach from TPG-GIP
last August but since then has been in steep decline, touching a low of 40c
last month after the half-year results failed to reach market consensus.
The prices had since risen to 63c, and jumped on yesterday's announcement,
perhaps on hopes of a full takeover offer, to close up 9.5c, or 15 per cent,
at 72.5c, after sales as high as 90.5c. That capitalises the company at only
$500 million, and when capex requirements of $500 million to $800 million
are added to the corporate debt, it means total debt is now around 9 times
EBITDA.
While Asciano flagged the possibility of a takeover bid, that must be
regarded as unlikely. A change of control would almost certainly trigger a
need to refinance the debt, and the banks are likely to want out, which
would mean that any bidder would need to come up with $6 billion-plus in
cash -- a big ask in today's environment.
It's not so long ago that ports were selling at multiples of more than 20
times EBITDA. The TPG-GIP proposal represented an EBITDA multiple for the
entire group of only 10 to 11 times, but the multiples would be much lower
in the current climate.
Asciano's problems are compounded by the fact that it is in a softening
trading environment, with revenue and profits in decline. The company
appears to have missed a timing opportunity -- it should have adopted the
current expanded monetisation approach seven months ago instead of the
half-baked partial monetisation strategy.
Matthew Geier
> AU, Asciano was doomed by a flawed model Bryan Frith | March 17, 2009
>
> Article from: The Australian
>
> ASCIANO is starting to look like a runaway train.
>
I wonder what happens to PacNat's rail operation if it's holding company
collapses ?
At the moment even corporate vultures seem to be in short supply.
Years ago I remember one of the coach lines collapsing so suddenly in
the end that coaches were arriving at their city depots to find them
locked up and dark. Could PacNat end up just 'ceasing to be' ?
DW downunder
"Matthew Geier" <mat...@no.sleeper.no.apana.no.org.no.au> wrote in message
news:49c00eeb$0$12942$afc3...@news.optusnet.com.au...
Bankruptcy, receivership, liquidation.
QR National will be not far away, I'm sure. Mad if they're not gearing up to
move quickly when the opportunity arises. But they'll decline (most
forcefully!!) to take on the debt, leaving more banks with "toxic" assets.
DW from WA