MIG to split assets according to risk profile

The toll road investor is considering separating its portfolio of roads into two separate companies. Macquarie Group will remain the manager of the more risky assets, while the less risky assets will be effectively spun off from its parent.

Macquarie Infrastructure Group (MIG) is planning on splitting its portfolio of roads into two separate listed companies.

Toll roads: not all are
low-risk

The toll road investor said in a filing to the Australian Securities Exchange today that it is considering a restructuring which will see Macquarie Group remain the manager of the more risky assets, while the less risky assets will be effectively spun off from Macquarie Group. The structure is aimed at providing “greater clarity around the investment profile of the two separate portfolios”, according to MIG chairman Mark Johnson.

The entity which MIG is planning on spinning off under the restructuring would be called “Mature MIG” and would comprise the 407 ETR in Ontario and the Westlink M7 near Sydney. According to MIG, these assets have “stable capital structures and mature cash flows”. MIG said its current chief executive officer, John Hughes, , and Luke Oxenham, head of investor relations, would be offered the positions of chief executive officer and chief financial officer, respectively, of Mature MIG. Based on MIG’s valuation at the end of June, Mature MIG would have a portfolio value of A$3.64 billion (€2.24 billion; $3.32 billion). Their net debt outstanding is about A$1.62 billion.

MIG’s remaining assets, comprising the M6 Toll in the UK, the APRR in France, the Chicago Skyway, the Indiana Toll Road, the South Bay Expressway in California, the Dulles Greenway in Virginia, the Warnow Tunnel in Germany and toll system provider Transtoll, would remain under the management of Macquarie Group under the proposal.

“These assets require substantial operational and financial management to maximise value to security holders,” MIG said in the statement. Many of the assets in this portfolio were very heavily leveraged and are currently losing money. For instance, the Skyway and the Indiana Toll Road are both currently posting net losses because for each of those assets the interest expense alone for their debt greatly exceeds their operating revenue, according to their latest audited financial statements. The 407 ETR, by contrast, has interest expenses below its revenues and is able to post positive net income, according to its financial statements.

MIG said Peter Trent, a senior executive at the firm, and Mary Nicholson, MIG’s chief financial officer, would be offered the positions of CEO and CFO respectively of the new company, which MIG is proposing to call “Active MIG”. In June MIG valued the eight assets in Active MIG’s proposed portfolio at A$1.45 billion. Their net debt is outstanding is about A$8.76 billion.

MIG said there would be A$226 million of surplus cash available for distribution after providing adequate working capital for both entities under the planned restructuring. This cash would be paid to security holders through a special distribution of 10 cents per security. The firm had a total of A$678 million of cash on its books as of 29 October, according to an investor presentation.

The proposals represent the latest attempt by Macquarie to offload its satellite funds. Earlier this month MAp (formerly Macquarie Airports) completed its spinoff from Macquarie and earlier this year the Macquarie Communications Infrastructure Group was sold to the Canada Pension Plan Investment Board.

Under the proposals MIG Active would revise its base management fee structure to 2 percent for the first A$1 billion of market capitalisation, 1.25 percent for capitalisation between A$1 billion-A$3 billion and 1 percent above A$3 billion. MIG’s current fee structure is 1.25 percent for the first A$3 billion and 1 percent above $3 billion. Macquarie Group would be paid a fee of A$50 million under the proposals, and would also receive 1 percent of the post-restructuring market capitalisation of mature MIG.

MIG did not specify in the press release how its existing ownership base would be apportioned across the two listed vehicles once they are split. The firm’s largest shareholders include Macquarie Investment Management (17 percent of shares outstanding), the Ontario Teachers Pension Plan (12 percent), and Lazard Asset Management Pacific Company (10 percent), according to Thomson ONE Banker. 

It did say, however, that the plan can be implemented without breaching any change of control provisions that would cause Mature MIG's debt facilities to have to be refinance. Nor would any pre-emptive rights, or rights given to other asset owners to buy the stakes of another co-owner, be triggered by the proposal

MIG said that it has more work to do to implement the structure and will provide more details at a future date. Equity analysts covering the stock, including JPMorgan's Kirsty Mackay-Fisher, have previously written in their research reports that the markets would be disappointed should MIG not announce a deal for its demerger proposal by the firm's 30 October annual general meeting.

A general meeting to consider the proposed restructuring is expected to take place in January or February next year, MIG said in the filing.
 
MIG’s shares closed earlier today at A$1.45, up almost 6 percent.

Cezary Podkul contributed reporting to this article.