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Throwing Asciano a lifeline

Stephen Bartholomeusz

Published 2:27 PM, 4 Aug 2008



For months the market has been abuzz with speculation that Mark Rowsthorn was searching for a way to take Asciano private, in the wake of a serious crash in the value of its securities. With a bit of help from TPG Capital and Global Infrastructure Partners, it looks like he has found it.

While Asciano described the approach from TPG and GIP as an "unsolicited, non-binding, indicative proposal", which normally suggests the offer is hostile, the fact that the aspiring bidders are being advised by Macquarie Group would tend to signal otherwise.

Macquarie has had a close relationship with Rowsthorn, Asciano’s founding CEO and biggest security holder, which makes it unlikely it would be party to anything inimical to his interests.

The other telltale sign is that the proposal involves something other than the normal private equity cash consideration. Asciano said that as well as the proposed $4.40 of cash per Asciano security, the prospective bidders had proposed a scrip alternative of unlisted securities in a bidding company.

That would appear to have been designed specifically for Rowsthorn, to enable him to maintain a substantial interest in the Asciano businesses. Whether Rowsthorn, who owns more than 10 per cent of the group, believes the proposed terms are sufficiently attractive to support the proposal is unclear.

Asciano was spun out of Toll Holdings last year in the wake of the successful takeover of Patrick Corporation, partly to address competition policy concerns but also as a result of a parting of the ways between Rowsthorn and Toll’s Paul Little.

On paper the way the separation was structured made sense. The acquisitive Toll was left virtually debt-free while Asciano, with its core infrastructure assets, was geared up. The timing of the spin-off was, however, unfortunate.

With hindsight, it would have been better to load Asciano up with significantly less debt. It has been caught up in the investor backlash against listed infrastructure stocks and the leverage in their balance sheets.

Asciano was floated in July, just before the sub-prime crisis emerged. The value of its securities has plummeted from nearly $12 to a low of $2.68 and the group has come under pressure to recapitalise its balance sheet. It had been looking at asset sales, both full and partial, as well as the unpalatable option of a major equity or hybrid security issue.

The nature of the Asciano asset base and the extent of the decline in the value of its securities make it a compelling target for private equity.

Like most of its peers, TPG has been sidelined by the credit crisis. It has plenty of available capital in its funds but the soaring cost and limited availability of debt for leveraged transactions has made it near-impossible for it to meet its ambitious expectations.

Asciano won’t be a highly leveraged transaction if it proceeds. Particularly if Rowsthorn and his team – and any of Asciano’s institutional security holders – decide to join TPG and GIP in the buy-out.

GIP, founded by Credit Suisse and GE last year when they raised $US5.64 billion to invest in infrastructure assets, has a record of conservative financing. The fund contains $US1 billion of their own capital.

Away from the spotlight and volatility of the listed environment, Asciano would look attractive to pension funds and other longer term investors. Its ports and rail businesses are highly strategic assets with substantial internal growth potential. If they can acquire it at this distressed point in the cycle and fund the obvious expansions, TPG and GIP could exit the investment in the normal three to five-year timeframe for private equity with handsome returns, despite the high cost of capital.

The problem with Asciano is its capital structure and the generally negative view investors have taken of listed infrastructure, rather than its actual operations.

TPG and GIP are offering to fix both those issues. The $2.9 billion question is whether the terms they have proposed are compelling enough for Rowsthorn to back the buyout and join their team.



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