By Léo Clément, Dorian Song (HEC Paris), Nancy Huang, Daniel Acret (University of Melbourne)
Photo: NASA (Unsplash)
Overview of the deal
Acquirer: Consortium led by Brookfield Asset Management Inc.
Target: AusNet Services
Total Transaction Size: A$10.2 billion
Closed date: 2022/02/18
Acquirer advisor: Dentons
Target advisor: Allens
AusNet was the last publicly traded electricity infrastructure company, meaning that the sector is now fully privatised. The deal follows KKR’s buyout of Spark Infrastructure. Brookfield’s consortium includes Alberta Investment Management Corporation, Healthcare of Ontario Pension Plan, and Investment Management Corporation of Ontario. Such a consortium continues the trend of pension funds investing in stable long-term cash flows yielded infrastructure. Brookfield’s bid outcompetes gas giant APA group’s previous offer. AusNet’s shareholders massively voted in favour of the A$2.65 per share offer (>99%), representing a premium of 34% compared to the A$1.98 price at which the company’s share was trading before the news of the bid.
Company Details (Acquirer - Brookfield)
Brookfield is an asset management company focused on alternative investment and has more than US$688B in assets under management as of 2021. While headquartered in Canada, it operates worldwide and focuses on real estate, infrastructure and renewable energy.
Founded in 1997, headquartered in Toronto, Ontario, Canada
CEO: Bruce Flatt
Number of employees: ~181,000
Market Cap: US$85.9Bn (as of 19/04/2022)
EV: ~US$255.8Bn
LTM Revenue: ~US$75.7Bn
LTM EBITDA: ~US$19.1Bn
LTM EV/Revenue: 3.4x
LTM EV/EBITDA: 13.4x
Company Details (Target - AusNet)
AusNet is an energy distributor and service provider. It produces and delivers electricity and provides natural gas by owning the distribution assets in Victoria, Australia.
Founded in 1994, headquartered in Southbank, Melbourne, Victoria, Australia
CEO: Tony Narvaez
Number of employees: 1,500
Market Cap: A$7.0Bn (as of 31/03/2021)
EV: A$17.8Bn
LTM Revenue: A$1.9Bn
LTM EBITDA: A$ 1.2Bn
LTM EV/Revenue: 9.3x
LTM EV/EBITDA: 15.1x
Projections and Assumptions
Short-term consequences
Brookfield’s strategy appears to be grounded in the long-term, with Upson, Brookfield’s head of the Asia Pacific, reportedly declaring, “we are planning to… build the infrastructure required to get to net-zero.” Despite this long-term focus, the taking private of AusNet has had clear short-term benefits, with the increased flexibility in their capital structure allowing for material improvements in AusNet’s ability to adapt to changing enviro-economic circumstances. Shareholders no longer require steady and regular dividends by shareholders in conjunction, and AusNet now has a lower regulatory burden, consequently supporting the underlying decarbonisation rationale for the deal.
Moreover, being a private equity acquisition, there were no synergies to be realised, which usually restricts the capacity to pay for financial sponsors. Surprisingly, Brookfield’s consortium outbid the strategic buyer APA, with Brookfield’s deep pockets and ability to carry the costs of Australia’s carbon transition likely contributing to this outcome. Subsequently, Brookfield utilised a scheme of arrangement to close the acquisition,which implies full support from the AusNet board for the deal. Friendly acquisitions such as these tend to have a high chance of realising profits, as AusNet’s employee base will be more amenable to any changes Brookfield has planned.
As such, Brookfield unequivocally has ambitious plans for AusNet and has prudently positioned itself in the short term to achieve its goals.
Long-term Upsides
The Canadian asset manager’s plans for AusNet are grounded in long-term ambitions, with Stewart Upson, Brookfield’s local Managing Partner and Asia-Pacific head, declaring AusNet to be a ‘forever asset.’ Forever is admittedly a very long time, even in the scope of long-life assets. Brookfield’s strategy is supported by the deal structure, as the investment comes from Brookfield’s open-ended Super Core Infrastructure fund, alleviating any pressures on net returns by a specific date.
Ausnet’s ~A$9.6bn regulated and contracted electricity transmission and distribution asset base presents an attractive opportunity for investors looking for predictable earnings & cash flows. However, Brookfield has broader ambitions for AusNet, capturing an alignment with the firm’s diversified focus on capitalizing on the global transition to renewable energy. Brookfield currently enjoys a leading position in global decarbonization, with upwards of U$60bn of renewable assets under management and an installed capacity of 21,000MW, expertise the firm will leverage in AusNet’s long-term strategy.
Raising U$15bn towards their newly introduced flagship Global Transition Fund earlier this year, Brookfield is well aware of the high capital investment needed to drive decarbonisation. With an estimated additional A$30bn in investments required to support AusNet’s net-zero 2050 target, the deep-pocket asset manager is primed to accelerate AusNet’s transition and create a local leader in renewable energy. Under new ownership, the now-private energy provider will enjoy newfound financial flexibility that releases the constraints of its listed past since cash flows can now be purely directed to new investments without the need to reward investors with dividends. Although AusNet is not alone in the race towards leadership in Australian renewable energy, Brookfield’s play provides a platform for success that ensures the critical infrastructure asset benefits all stakeholders.
Risks and Uncertainties
Despite the overwhelmingly positive shareholder response and optimism demonstrated by both acquirer and target, there are several critical issues that need to be considered and mitigated accordingly. Firstly, Brookfield must consider how AusNet would fit into their portfolio as they restructure their existing portfolios and raise new funds.
“One by one they have gone purely because the listed market is not willing to pay a higher multiple for these businesses because in the listed market they demand low levels of gearing.” - Vertium CIO Jason Teh