Beating the barriers

Queensland Motorways (QML)
Sponsor: Queensland Investment Corporation (QIC)
Geography: Brisbane, Australia
Sector: Transportation
Deal size: Large cap (>$500 million)
Initial investment date: May 2011
Realisation date: April 2014
Top-line revenue growth: Approximately 23 percent over FY2011-2014 on the foundation assets (44 percent on a pro-forma basis factoring in the annualised uplift from the acquisitions)
EBITDA growth: Approximately 38 percent over FY2011-2014 on the foundation assets (54 percent on a pro-forma basis factoring in the annualised uplift from the acquisitions)
Average time per month spent with portfolio company (days): QIC committed extensive resources to support the commercialisation of Queensland Motorways with dedicated resources seconded into the business upon acquisition in 2011 to drive the transition and other QIC resources embedded within specialty teams pursuing projects such as the acquisitions. QIC was also directly represented on the board of Queensland Motorways by two investment team members.

Toll roads may be one of the most straightforward (read not very exciting) assets within the infrastructure space. They do not comprise technical elements the way a natural gas-fired power plant does, for example; nor do they require managing diverse lines of business as is the case with airports.

Yet the Queensland Investment Corporation (QIC), one of Australia’s leading institutional managers, made Queensland Motorways interesting both as a physical asset as well as a transaction.

QIC, which was founded in 1991 by the Queensland government, acquired Queensland Motorways (QML) in May 2011 for A$3.088 billion (€2.1 billion; $2.4 billion). Within three short years, QIC was able to sell it for A$7.057 billion, exceeding even the highest estimates and providing QIC’s client, the State of Queensland’s Defined Benefit Fund, a gross uplift of about A$3.8 billion.

The reason QIC was able to do so was not only because it took a public sector company and turned it into a commercial enterprise, but because it targeted strategic acquisitions that produced a toll road network.

“I was impressed with QIC’s turnaround methodology and their laser-like focus on creating new value for its investors,” Michael Barz, a partner at Dentons, said. “QIC’s approach to managing QML as a stand-alone asset is a good primer for how to approach the acquisition of a new business.”

One of the first things QIC focused on when it acquired the initial three assets that comprised QML – Gateway Motorway, the Gateway Extension Motorway and Logan Motorway – was to accelerate the commercialisation of QML. Initiatives involved making changes to the existing management team; reconstituting the board of directors so that the majority of the board members would be independent non-executive directors; and overhauling organisational budgeting methods and business planning processes.

The outcome of the commericalisation process was that QML was able to increase like-for-like normalised EBITDA by approximately 38 percent during QIC’s ownership, with QML’s EBITDA margin climbing from 67 percent to more than 75 percent, according to QIC.
Richard Little, an infrastructure policy consultant and a visiting scholar at Rensselaer Polytechnic Institute, was impressed by the turnaround. “QIC was required to operate a ‘business’ with lots of public sector enterprise constraints still in place,” Little said. “They appear to have negotiated this fault line successfully and produced a financially viable entity which provides valuable public services.”

Once commercialisation had progressed substantially, QIC began focusing on strategic acquisitions. In late 2012, QIC approached the Brisbane City Council, the government authority responsible for procuring and financing Go Between Bridge and Legacy Way, two toll roads in South East Queensland, with an unsolicited proposal for QML to acquire the tolling rights for both. Binding agreements were signed in September 2013.

It was at that time that QML also acquired the Clem Jones Tunnel (Clem 7), a 6.8-kilometre toll road comprising twin two-lane tunnels and associated road connections. Clem 7 opened in 2010 but was placed in voluntary administration in February 2011 due to traffic volumes that fell well below forecast levels.

By acquiring the three other assets, “we were able to add a couple of roads that were within the inner city ring, which were decongesting roads,” head of QIC Global Infrastructure Ross Israel told Infrastructure Investor in a previous interview.
“So by adding those three, you captured the majority of growth corridors in the city from a traffic perspective, providing a diversification benefit for the portfolio as a whole as well as extracting economies of scale,” Israel explained.

“Now all those benefits are being realised by the pension beneficiaries that QIC is really working for,” David Narefsky, a partner at Mayer Brown, remarked.