Still rock and roll

It must have been because it was tired of being in the passenger’s seat, or maybe it’s because it had missed the previous boat. Whatever the reason, Hong Kong conglomerate Cheung Kong made a splash last month when it agreed to pay £2.5 billion (€3.3 billion; $3.8 billion) to a consortium formed of 3i Infrastructure, Morgan Stanley Infrastructure Partners, STAR Capital and its co-investor PGGM for Eversholt Rail, one of the UK’s three largest rolling stock operating companies (ROSCOs).

These have proven particularly popular of late. Porterbrook, formerly owned by the London-based iCON Infrastructure, Deutsche Bank, France- and UK-headquartered Antin Infrastructure Partners and Canadian pension OPTrust, was acquired by German-based Allianz Capital Partners, Canada’s Alberta Investment Management Corporation (AIMCo), Australian fund manager Hastings Funds Management and EDF Invest of France last October. Analysts have estimated the company’s value at about £2 billion.

Angel Trains, the last member of the UK’s ROSCO trio and a portfolio company of Babcock & Brown spinout Arcus Infrastructure Partners, hasn’t changed hands since 2008. But a number of smaller leasing businesses have. Last May, to name a couple, London-based Pamplona Capital acquired the UK’s Beacon Rail from a subsidiary of Japan’s Mitsubishi UFJ in a $450 million transaction, and Californian firm Oaktree Capital Management bought Munich-based Railpool from two German banks for an undisclosed sum.

Strong appetite for ROSCOs seems to be more than a fleeting fad: Cheung Kong reportedly decided to pre-empt an auction on Eversholt after losing out on the Porterbrook sale. Yet investors which stood to make the most money were probably those who turned up to the station a few years ago.

Created in 1994 as part of the privatisation of British Rail, the UK’s largest ROSCOs were subsequently largely owned by banks, and then sold to private investors over the last decade as lenders strived to strengthen their balance sheets. In 2010, when HSBC, former owner of Eversholt, decided to follow this route, the sector was little known to infrastructure investors. “Back then these assets were less well understood than normal core infrastructure like regulated utilities,” says Ben Loomes, co-head of infrastructure at 3i.

“After spending a lot of time understanding the business, we saw an opportunity to buy what we considered was an infrastructure asset.” There’s much to back this argument, he explains: Eversholt owns and operates real assets, it enjoys a solid strategic position (it owns 28 percent of the UK passenger rolling stock) and has a good number of existing contracts with train operating companies (its 19 fleets are leased to 11 of them).

Throughout their ownership, 3i and its partners proceeded to strengthen the business through extending its existing leases and developing the fleet, negotiating better rates and optimising its capital structure. The latter was achieved through the issuance of three long-dated public bonds totaling £1.1 billion in December 2010 and March 2011, a private placement of £150 million in December 2012 and two further bank re-financings in November 2013 and November 2014.

This helped stabilise cash flows, which made the ROSCO an even more attractive yield play. In the event, however, it seems Eversholt’s selling consortium will also make a whopping profit through capital gains: 3i initially invested £151 million in the business, which it valued at £241 million last September; it is now selling its stake for £358 million, plus an extra dividend of £15.5 million. Sources close to the matter say that 3i and STAR, which both declined to comment on performance, stand to reap respective return multiples of 3.3x and 3.4x on the transaction.

“At 3i Infrastructure we generally don’t sell assets, as we aim to hold them for the long term,” says Loomes. “But we felt we were offered an exceptional price.” Four years is a fast turnaround in infrastructure, and it may be a while before another large ROSCO comes on the block. But if you can resell your ticket at a large profit, it’s probably time to hop off the train.