A tale of two deals

When Toronto-based fund manager Brookfield Asset Management set out with its partners – the British Columbia Investment Management Corporation and Singapore’s sovereign wealth fund GIC – to acquire 100 percent of Sydney-based Asciano in July 2015, no one could foresee the many twists and turns this large-scale transaction would take. The next 12 months proved to be full of regulatory hurdles, revised proposals and intensifying competition as a rival consortium emerged.

A few months after Brookfield, British Columbia Investment Management Corporation and GIC put forth a cash and scrip offer which valued Asciano at A$9.05 ($11.1; €10.5) per share – bringing the takeover offer to a total of A$9 billion – Qube Holdings, another Australian logistics company and its partners – Global Infrastructure Partners and China’s CIC Capital – arrived on the scene acquiring a 19.99 percent stake in the company. But the emergence of a rival was not Brookfield’s biggest obstacle.

“The concerns that the ACCC raised ended up being the biggest challenge,” Brookfield managing partner Stewart Upson remarks, referring to the Australian Competition and Consumer Commission. “The rest of it is kind of a normal process, but the ACCC’s concerns are what really led to the transaction being re-shaped and ending where it did.”

THE WINDING PATH TO ASCIANO
The ACCC was concerned that the vertical integration resulting from Brookfield’s proposed acquisition would lead to a substantial lessening of competition in the above-rail haulage services markets in Western Australia and Queensland, given that Asciano’s above-rail business, Pacific National, operates on Brookfield’s rail network in the western part of the country. Pacific National also transports coal to Dalrymple Bay Coal Terminal, another asset Brookfield operates under a long-term agreement.

But as Brookfield and its partners worked on several revisions, including a commitment to divest Pacific National post-acquisition and to bring in an additional partner – the Qatar Investment Authority – to reduce Brookfield’s stake, Qube and its partners structured and submitted their own binding offer for the company.

However, the Qube consortium had its own regulatory hurdles to overcome.

“The key thesis for Qube in this transaction was that to extend their transport and logistics chain right to the point where containers come off the ships. Patrick Terminals operates some of the best positioned in-terminal facilities in Australia and represented a rare strategic opportunity for the Qube business to expand,” explains Andrew Bullock, a partner at Gilbert + Tobin, whose team advised Qube initially on the ports component of the deal.

“Qube is a full logistics chain business and its management had previously operated Patrick Terminals before it was acquired by Asciano,” he continues. “They felt that strategically it was a fantastic opportunity to better integrate the container terminals of Patrick with the rest of their business. But various other components of the Asciano business that were port-related were areas that Qube already participated in, so there were material competition issues, anti-trust issues.”

After a lot of back and forth between the competition watchdog and the Asciano board, one path began to emerge as the only way forward.

“In hindsight, I think it became clear to everyone – ourselves, the other consortium and the company – in early February [2016] that neither party would be able to acquire the entire business without some very protracted engagement with the ACCC,” Brookfield’s Upson says.

“At that point, the company had been going at it for nearly 12 months,” he adds, referring to Asciano. “And they’d gone through different iterations with other strategic transactions a few years before, so it was really dragging on from their point of view.”
Indeed, Asciano had considered selling its business or part of it in 2008. In August of that year, it rejected a takeover offer from a consortium led by TPG Capital and including GIP, which valued the company at A$2.9 billion, deeming it too low.

This time around it encouraged both sides to work together and come up with a joint solution. The two consortia did so in March 2016 submitting an all-cash offer of A$9.05 billion.

The joint bid that was approved last August proposed a scheme of arrangement under which: the Brookfield consortium and Qube have acquired Patrick Terminals on a 50/50 basis for A$3.84 billion; the Brookfield consortium has acquired 100 percent of Asciano’s Bulk & Automotive Port Services business (now re-named Linx Cargo Care) for A$925 million; and Qube now owns 100 percent of Australian Amalgamated Terminals, after acquiring Brookfield’s 50 percent stake per the agreement, according to a Brookefield spokesperson.

Asciano’s rail business was acquired in its entirety by a separate consortium that did not include Qube or Brookfield. The Canada Pension Plan Investment Board acquired 33 percent for approximately A$1.7 billion, GIP acquired 27 percent, while the remaining 40 percent is held by CIC Capital, bcIMC and GIC the spokesperson says.

A small component of the Patrick Terminals business – the 50 percent joint venture interest in ACFS, a logistics business – was transferred to the joint venture partner, partly to address concerns expressed by the ACCC.

Asked why Brookfield decided to move forward with the deal when it had originally intended to acquire 100 percent of the company, Upson responds: “The reason we were originally attracted to Asciano is that we knew the management and had a really good relationship with them.

“We are value investors and we look for those short-term dislocations. In this case and in regards to the rail business, there were concerns around the future of coal, but in our view, while there are issues to consider in the long-term, we felt it was overblown in the short-term,” he explains.

“On the port side of the business, the company stock was trading unfairly lower because of softness in the economy and new capacity coming into the market. Again, both these things we see as things that will pass over time and we will get long-term value,” Upson concludes.

AN INNOVATIVE PRIVATISATION

Australia is no stranger to port privatisations, but the privatisation of the Port of Melbourne, the country’s busiest container port and the last one to be privatised in the state of Victoria, was different in some fundamental ways.

“In the landlord port space, when we’ve seen previous ports privatised, the regulatory model has typically been much more akin to a very light-handed price monitoring regime. In this case, the Victorian government put in place a very innovative regime wherein for the first 15 years, the weighted average increase in tariffs for prescribed services is capped at CPI annually,” says Trent Carmichael, principal of global infrastructure at QIC, the investment manager and one of the leaders of the winning Lonsdale consortium, which was awarded a 50-year lease in September beating another group led by IFM Investors.

“Thereafter, price increases are subject to a more traditional building-block type regulatory approach,” he adds.

Asked why the pricing cap did not deter Lonsdale from bidding A$9.7 billion, a price that significantly exceeded the A$5 billion to A$7 billion the government of Victoria was hoping to collect, Carmichael responds: “We saw the regulatory regime as a positive, given the enhanced certainty it provides to both users of the port and the landlord. The regime was also a key element in the consortium’s business plan, which included a detailed port development plan that we submitted with our bid.”

In addition to the stronger pricing oversight, the government also adopted a mechanism in its enabling legislation that would compensate the new owners in the event it built a competing port within the first 15 years of the concession.

While these provisions aligned with the competition authority’s position that a transparent pricing framework should apply to monopolistic assets in the future, it did present a number of challenges for the consortium and its legal team.

“The state has more levers to pull in relation to this port compared with what the New South Wales and Queensland governments have in connection with Port Botany and the Port of Brisbane,” explains Robert Nicholson, a partner at Herbert Smith Freehills, whose team advised the Lonsdale consortium.

“We just had to be very careful that those levers were properly balanced and that the interests of the port owner were going to be appropriately reflected in those arrangements, which we think they are.”

While the 15-year cap on the compensation mechanism translates into a level of exposure for QIC and its partners – Future Fund, GIP and Borealis, the infrastructure investment arm of Canada’s Ontario Municipal Employees Retirement System – the consortium was convinced that there were sufficient capacity initiatives that could be undertaken to ensure that trade was catered for during the term of the concession.

To that end, the new port owners will invest more than A$6 billion over the life of the concession, a commitment they have made as part of the business plan both bidders were required to submit along with their bid. “This development plan sets out our preliminary vision for how the port can be expanded and grown over the next 50 years to cater to expected demand and how users could be better serviced, including through improved landside logistics connectivity,” Carmichael explains.

It was this detailed plan, which may have clinched it for the Lonsdale consortium, as the bids were quite close in value with a difference of only A$15 million.

“It was pleasing for us to get some direct feedback from the state and its advisors that the plan we put forward was quite compelling in terms of the bid evaluation process and particularly because the bids were reportedly so close,” Carmichael says, adding that the latter is also a testament to the quality of the asset.

There are a number of aspects of the port that QIC and its partners found attractive and worth their capital, not least of all its status as a landlord port, which Carmichael describes as a “scarce opportunity set”.

“When you think about the universe of port opportunities around the world, more often you are just getting a chance to buy into a terminal asset,” he notes. “But the reality is when you’re just buying into a single terminal, you’re not only competing with other ports you’re also probably competing with the terminal on the other side of the dock.”

The extensive upgrade the port has recently undergone was also a decisive factor. With the completion of Phase I of the Webb Dock East Terminal project, the port has acquired a new international container terminal and a third terminal operator.

“From a business model perspective, the majority of revenues are linked to trade volumes but another important source of revenue is periodic rental payments from the port’s tenants. In the Port of Melbourne’s case, those rental payments are not directly linked to trade performance and are typically payable under long-term leases. For us, as an infrastructure investor, that provides a strong underpinning of future performance,” Carmichael remarks.