Why Carlyle went Down Under

For observers of infrastructure funds in the US, Carlyle Infrastructure Partners’ sixth and latest investment may have come as a bit of a surprise. The $1.1 billion infrastructure fund, which has previously agreed to invest in a California-based water utility, an Illinois school bus operator and a Connecticut highway rest stop joint venture, sealed its latest deal: in Australia.

In February, the fund announced it would buy a 15 percent stake in Qube Logistics, an Australian operator of land and marine transportation businesses, for A$116.5 million (€84.2 million; $117.5 million) via a two-step private share placement with the Australian Stock Exchange-listed company.

But while the deal was not a continuation of the streak of US deals the fund has agreed in the past, it shouldn’t be totally unexpected. Carlyle funds can usually allocate a portion of their funds outside their core mandates. For the US-focused Carlyle Infrastructure Partners, up to 30 percent of its investments can derive from overseas, according to a spokesperson.

No stranger

Why would Qube be a sufficiently interesting investment proposition for Carlyle Infrastructure Partners to go international? For one, Carlyle and Qube weren’t strangers prior to the deal. Chris Corrigan, chairman of Qube’s investment advisory committee, worked with Carlyle in 2009 when the two firms put in a recapitalisation offer for Asciano, the debt-laden Australian transport infrastructure operator whose container port subsidiary, Patrick, used to be headed by Corrigan.

Equally important, the valuation of Qube must have looked compelling since the company is currently structured as an externally managed trust. Externally managed vehicles of all sorts fell out of favour with Australian institutional investors during the financial crisis. Entities still structured this way have seen their share prices stagnate – no matter what the underlying earnings or future growth prospects.

For most of 2010, Qube was stuck at under A$1 per share but popped up to a 52-week high of A$1.68 per share just a few days after Carlyle’s private placement, at A$1.125 per share, was announced. Perhaps the market finally took note of the 33 percent revenue growth in its operating logistics business once Carlyle got on board.

But Qube won’t remain an externally managed entity for long. Prior to the Carlyle investment, Qube made clear it would seek to internalise its management and convert itself from a trust into a corporation. The new structure should make it more agreeable to investors wary of the external fund model as well as give it more flexibility in pursuing future growth opportunities – both plusses for the share price in the medium term.

There will also be no shortage of opportunities for Qube to use its freshly raised cash from Carlyle once the deal closes. On 1 January Qube’s put and call options on one of its subsidiaries, port logistics provider P&O Trans Australia (POTA), became exercisable. Exercised at the same time, they could give Qube a 100 percent voting interest in POTA, which lies at the heart of its landside logistics division.

Asciano revisited?

The Qube investment could even give Carlyle an opportunity to give the Asciano deal another try. At the same time as Carlyle Infrastructure Partners’ private placement was being announced, Qube’s Corrigan was indicating in interviews with Australian media that he might make another bid for Asciano. “It’s a business we know and are interested in,” he told The Australian, adding: “we’re not in a position to make a ridiculous offer”.

In August 2008, Asciano rejected a joint takeover offer worth A$2.9 billion from private equity firms TPG and Global Infrastructure Partners, saying that the offer was too low and undervalued the company’s business.

Only time will tell whether Asciano will entertain another round of bidding, but it’s safe to say Carlyle will be in a much stronger position to participate once the Qube deal closes.