A group of minority shareholders of Spanish toll road developer Cintra are protesting a proposed buyout of their interests by majority shareholder, Spanish infrastructure manager Ferrovial.
The minority shareholders – Britain's Universities Superannuation Scheme (USS), Australia's CP2 Limited and Magellan Asset Management and the State of New Jersey Division of Investment – have submitted a letter to Cintra’s board opposing the deal since it would give them exposure to unwanted business sectors and geographies and higher risks associated with Ferrovial’s highly leveraged balance sheet.
Ferrovial owns 67 percent of Cintra’s total share capital. The remaining 33 percent is publicly traded. Together, the four signatories represent about 13 percent of the publicly traded shares and about 4.2 percent of the firm’s total share capital. They do not have any representation on Cintra’s board of directors.
On 19 December, Ferrovial disclosed that its board was evaluating a proposal to buy out the 33 percent of Cintra it does not already own, though no purchase price has been proposed. It previously spun off some of its interests in Cintra by listing it on the Madrid Stock Exchange in October 2004.
The proposed merger would likely proceed as a stock swap, giving minority Cintra shareholders a number of shares in Ferrovial in exchange for tendering their Cintra shares. Analysts estimate the likely exchange rate would be about 5 Ferrovial shares for each Cintra share.
Ferrovial shares have sunk from a high of €82.95 in 2007 to recent lows of €16.10 as the company has come under pressure to de-leverage its balance sheet amid sagging revenues. Its consolidated debt of €24.1 billion as of the end of 2008 is nearly three times Cintra’s long-term debt of €8.5 billion.
We invested in Cintra because it is an infrastructure asset. Had we wanted to invest in Ferrovial, we would have done so. It is a completely different asset.
Buying out the remainder of Cintra’s shareholders would give Ferrovial full access to the company’s cashflows and nearly €400 million in cash reserves and allow it to use some of Cintra’s stronger road assets, like the 407 ETR in Canada, as collateral against some of its bank debt, according to equity research analysts who cover Ferrovial. The deal would also come at a time when Cintra stands to raise as much as €1 billion from the sale of its parking business.
The minority shareholders – many of whom bought into Cintra due to its specialist focus on toll roads – don’t see this as a fair exchange.
“It is very clear that all the benefits from the merger flow to Ferrovial shareholders only. We see no value creation for Cintra shareholders”, William Clark, director of the Division of Investment at the State of New Jersey, which manages the state's $63 billion pension, said in a statement.
“We invested in Cintra because it is an infrastructure asset. Had we wanted to invest in Ferrovial, we would have done so. It is a completely different asset,” Peter Doherty, Managing Director of CP2, told InfrastructureInvestor.
Ferrovial has businesses in construction services, airports (via majority-owned subsidiary BAA) and upkeep and maintenance services, in addition to its interest in Cintra’s toll road business. It posted 2008 revenues of €14.1 billion, versus Cintra’s €735.9 million.
Ferrovial chief executive Joaquin Ayuso denies that the company’s current cash needs motivated the decision to buy out Cintra’s minority shareholders.
“This decision has not arisen from any current need of Ferrovial, but rather from the strategy and business logic required in the world’s current financial markets,” Ayoso told Reuters in a recent interview.
Ayoso also told Reuters that Ferrovial plans to deleverage by using cash from asset sales to pay down debt. Last year, it sold Belfast City Airport to ABN Amro Global Infrastructure Fund for £132.5 million ($234.1 million, €164.2 million) and analysts at Credit Suisse predict that BAA’s forced sale of Gatwick Airport could fetch €1.5 billion, down from an earlier estimate of €1.7 billion.
The asset sales are another source of concern for the Cintra minority shareholders protesting the buyout.
“It is clear to me that the current focus at Ferrovial is on asset disposals and refinancing. In a difficult market for asset sales and with ongoing credit market dislocations, it remains difficult to see how the expected exchange ratio . . . comes anywhere close to representing a fair deal for minority shareholders,” Warren Low, European Fund Manager of USS, said in a statement.
Ferrovial has responded to the minority shareholders individually but has not made any public statements about their letter to Cintra’s board.
Spokespeople at both companies declined to comment.