Transurban Not Hot For Teacher, Yet

This story features TRANSURBAN GROUP LIMITED. For more info SHARE ANALYSIS: TCL

The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Andrew Nelson

Ontario Teachers Pension Plan (OTPP) and Canada Pension Plan Investment Board (CPPIB) have submitted an indicative and non-binding joint proposal to acquire 100% of Transurban ((TCL)) in a deal that values the company at $5.25 per share. The TCL board has rejected the offer in its current form, although brokers covering the news generally expect to see a higher bid emerge.

The proposal was made in the form of a scheme of arrangement, with investors to be given the  choice of $5.25 cash per security, an unlisted roll-over of 22% of scrip and top-up alternative, or a combination of both.

The $5.25 cash offer represents a 20% premium to Wednesday’s closing price. And while the board has knocked back this preliminary offer, it has still appointed Lazard and Mallesons as advisers and maintains that it remains open to further discussions.

Further discussions are exactly what analysts at RBS expect, as they saw this first effort as being opportunistic and aimed at taking advantage of the current low-point-of-the-cycle valuations of infrastructure assets. But with the broker noting that both sides are willing to negotiate, RBS feels that once a more appropriate valuation is attributed to the shares, board approval is likely.

Analysts as BA-Merrill Lynch are a little more sceptical, however, saying they can see no certainty of success, even if a new bid were pitched at $5.75. This is the stockbroker’s own valuation. 14.5% stakeholder CP2 holds the key, says Merrills, who expects it is very unlikely CP2 will accept a cash bid anywhere near $5.25 given they bought in at $5.49 just 17 months ago.

Even at $5.25, notes the broker, the stock is trading on 21.5x valuation to earnings ratio, which is a marked premium to its average of 17.5x since listing. The sector ex-regulated utilities is trading at around 13.5x, so despite what the broker sees as “sound operations and a steady growth profile”, it finds it tough to see Transurban as being one of the more attractive plays in the infra space.

If this potential higher proposal doesn’t go through and the Canadian pension plans end up walking away, then Merrills sees some serious risk to the downside. It’s this possibility of failure, in fact, that saw the broker downgrade the stock to Neutral from Buy this morning.

However, there is the unlisted roll-over plus top-up alternative in the deal and this could be the “x-factor”, thinks Merrills. On its reckoning, participants could acquire another 50% of their holdings at the bid price, and it hopes that this structure may well be able to deal with any CP2 objections.

RBS also holds out hope here, although it is a little more confident, saying that the condition allowing 22% of the shares the be rolled into an unlisted alternative, with a top-up option, is aimed squarely at CP2. So with Transurban and the Canadian partners willing to negotiate, the broker believes it’s only a matter of time before a sweetened deal is put in front of the board for approval.

This confidence has seen the broker upgrade its valuation to $5.70 (from $5.30) and its target price also to $5.70 (from $4.60), noting that this represents a 30% premium to the pre-bid price. Analysts at UBS have raised their price target to $6.00 (from $5.25), While Merrills and JP Morgan have remained firm.

All up, the FNArena average target price is $5.43. The stock rates a 0.6 on the FNArena Sentiment Indicator, which is based on 5 Buys and 3 Holds and a Restricted from JP Morgan, who is gagged given it is acting as advisor to both Canadian funds.

While broker reaction can be said to be mildly hopeful, investor reaction to the news is decidedly positive. As at 11:22 Friday morning, shares were trading 31c, or 5.9% higher at $5.55 versus a 12-month trading range of $3.51 to $5.80.

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