Transurban keeps powder dry, taps investors for WestConnex takeover

Add articles to your saved list and come back to them any time.

Transurban is keeping its financial powder dry for future acquisitions by tapping shareholders for $4.2 billion in new equity to fund the bulk of its full takeover of Sydney’s WestConnex.

The $39 billion infrastructure giant announced on Monday that it and its bidding partners had agreed to pay $11.1 billion to the NSW government for the 49 per cent of the Australia’s largest toll road project.

“Today’s announcement is incredibly significant for Transurban and a momentous moment for us,” chief executive Scott Charlton said.

Transurban and its consortium partners - AustralianSuper, the Canada Pension Plan Investment Board (CPPIB) and Abu Dhabi’s sovereign wealth fund - bought the first 51 per cent stake in WestConnex for $9.26 billion in 2018. Canadian infrastructure investor Caisse de dépôt et placement du Québec has replaced the CPPIB in the second deal, with kicked off in November last year.

The WestConnex project has been opening in stages over the past four years and when completed will form a 33-kilometre network linking Western Sydney with Sydney’s CBD, Sydney Airport and Port Botany.

Transurban will own half the road and on Monday said it would raise $4.22 billion of new equity from shareholders to cover most of its $5.56 billion contribution, with the remainder paid with cash.

Mr Charlton said that funding structure preserved its firepower to bid for other roads it has in its sights, which in Sydney include the M7 widening and M7/M12 interchange, and the potential sale of the Western Harbour Tunnel and Harbour Tunnel in Sydney; as well as the proposed North East Link in Melbourne.

“We need money for those other projects as well, so [we’re] trying to minimise the amount of times we have to come to the market,” Mr Charlton said. “We still have liquidity and capability to fund that opportunity pipeline.”

Transurban will control WestConnex until 2060. Between now and 2040, Transurban can increase tolls on the road every year by the greater of inflation (consumer price index) or 4 per cent, and then by inflation for the 20 years after that.

Super-fund backed investment giant IFM was also interested in buying the second half of WestConnex but reportedly dropped out of the bidding earlier this month.

Transurban is also pursuing potential acquisitions in the United States, and bracing for a possible financial blow from the dispute over its West Gate Tunnel project in Melbourne.

The company has previously estimated construction costs to have blown out from $6.7 billion to $10 billion. And on Monday it revealed it had paid $132 million to set up a disposal site for the contaminated soil which has derailed the project, and estimated it will lose another $450 million in revenue due to the road opening at least two years late.

Mr Charlton said those costs needed to be considered when negotiating with the state government and the project’s builders – CPB Contractors and John Holland – over how the construction cost overrun should be split.

On Monday Transurban gave distribution guidance of 15¢ per share for the December half, in line with the first half.

While the WestConnex transaction would be dilutive to free cash and dividends in the short term, Mr Charlton said the company will mitigate that by funnelling $600 million in capital releases (taking out debt against roads it owns outright) from the project to shareholders.

“There’ll be a minimum dilution in the near term,” Mr Charlton said.

Morgans analyst Nathan Lead said the $11.1 billion sale price was “meaningfully above what we thought was required to deliver a reasonable risk-adjusted return” ($9.8 billion), and that the equity raising at $13 per share was below his target price and therefore value dilutive.

The price tag was also above Credit Suisse analyst Paul Butler’s valuation of $10.3 billion, but he noted that Transurban had given higher traffic projections than he had factored in.

The equity raising will consist of $3.97 billion through a one-for-nine entitlement offer at a price of $13 — an 8.3 per cent discount to its closing price of $14.18 on Friday. AustralianSuper, which is a Transurban investor as well as a consortium partner, will buy $250 million of shares at $13.07 each in addition to taking up all the shares available to it under the entitlement offer.

Transurban put its shares in a trading halt until Thursday while the equity raising is conducted.

The Business Briefing newsletter delivers major stories, exclusive coverage and expert opinion. Sign up to get it every weekday morning.