Voting with their wallets

The extremes have never been so close to seizing the Élysée Palace. Barely a month before the French start casting their ballots, Marine Le Pen, leader of the far right National Front, is predicted to win more than a quarter of first-round votes. Polls have her jostling for first place against Emmanuel Macron, a former finance minister running as an independent. The candidate from the incumbent party, Benoit Hamon, is trailing far behind. François Fillon, the chosen man of the mainstream Republicains party and previously a favourite, has been hit by fraud allegations and placed under formal investigation.

Usually shy to comment on politics, investors readily admit that the climate is highly volatile.

“Things are pretty open. Almost anything can happen,” says Stéphane Brimont, head of France and Benelux at Macquarie Infrastructure and Real Assets. “The greater risk today is more political than economic. In France and elsewhere, such as the US, the UK and the Netherlands, you witness the emergence of parties and candidates that want to disrupt the prevailing system,” adds Mathias Burghardt, head of infrastructure at Ardian.

Strangely enough, uncertainty over the poll’s outcome – and legislative elections, scheduled for June – has largely failed to derail the market. Stéphane Ifker, a partner at Antin Infrastructure Partners, points out that January was one of the most active months in years for French M&A at large and says there has been no let-up in activity for Paris-based advisers. “I’ve seen quite a few presidential elections over the course of my career and it is the first time this happens. In particular, there’s been no real slowdown in the infrastructure market.”

Dealmaking is bound to decelerate as the campaign reaches its final days. But investors’ Gallic shrug in the face of volatility suggests they expect a relative continuity whoever ends up getting the top job – baring a victory of the extremes, to which most do not attach a very high probability.

“Half of the contenders have expressed views on infrastructure that make little sense. But the candidates that are most likely to win will probably be favourable to investment in infrastructure,” says Vincent Levita, founder and chief executive officer of InfraVia Capital Partners. In greenfield terms, he notes that the priorities of President François Hollande’s administration were not difficult to read: his ministers scored poorly on transport, but made strides in the fields of energy transition and telecoms, thanks to a big solar push and ambitious plans to roll out fibre-optic.

CHOOSE YOUR BATTLES
France’s greenfield market is not an easy one to penetrate. While the country’s brownfield auctions have seen large investors from Australia, Canada and Asia put serious amounts of cash on the table, opportunities to invest in newbuild projects are most often snapped up by domestic players, notes Alexandre Ancel, a partner at Allen & Overy. Ifker agrees, pointing out that large, homegrown industrial groups like Vinci, EDF and Veolia dominate the market. Specialist fund managers like Meridiam have also done well out of this, capturing a portion of the large-scale schemes on offer.

But France’s PPP market has not exactly thrived in recent years. In part this stems from where the country is in its procurement cycle: the government needed a bit of breathing space after undertaking a wave of large-scale PPP projects at the beginning of the decade, such as the €7.8 billion Sud Europe Atlantique high-speed rail line, observes Romaric Lazerges, a partner at Allen & Overy. The centre-left Socialist Party, in power since 2012, has not proven to be a big fan of the framework either, adds Emmanuel Tellier, head of EMEA infrastructure at Crédit Agricole.

Yet in the coming years, greenfield is likely to come back on investors’ radar. For one, the emphasis on fibre-optic is unlikely to abate, as all regions of the country endeavour to upgrade their broadband networks to provide “very high-speed” connections. Driss Bererhi, a partner at Allen & Overy, anticipates a dozen projects to take off, some of which will need sizeable capital injections: equipping Alsace, for instance, required about €600 million of investment; wiring the Grand Est region will demand more than €1 billion. “These projects are getting a lot of attention,” Berehri says.

Activity may also accelerate on the transport front. One opportunity investors seem to have their eyes on is the Route Centre-Europe Atlantique, a road project that market players evaluate at about €400-€500 million. Two groups seem ready to compete for the scheme, which is set to enter its first phase.

Complex projects launched five or six years ago and completed since are becoming ripe for refinancing, says Olivier Jaunet, chief operating officer for infrastructure at Crédit Agricole. PPPs such as the A41 and A28 have already gone through this phase; the A19 and A150 could do so this year.

But greenfield opportunities exist outside the paved tracks. Julien Touati, corporate development director at Meridiam, explains 2016 has yielded many transactions linked to the energy transition, ranging from heating networks and electric transport to biomass and school PPPs.

OLD WINE IN NEW BOTTLES?
Last year, novelty also came in the form of privatisations. France, a country where the state continues to play a hefty role in business, sought to tap investor appetite for infrastructure by selling 60 percent of two major regional airports: Nice and Lyon. Atlantia, EDF Invest and Aeroporti de Roma paid €1.2 billion to buy the former, with the latter going to Vinci Airports, Caisse des Dépôts and Crédit Agricole Assurances for €535 million. In both cases, competition was fierce: an insider says prices reached EBITDA multiples ranging between 15x and 20x.

Our observer also provides a nuanced view of what he sees as the shortcomings of the French market and the main reason why most Paris-based fund managers, by design, have a European outlook. “Twenty-sixteen was a typical year for France: a number of very big assets have tended to go from one state-owned to another state-owned entity. We’ve also had a number of small deals. But what we lack in France are medium-sized assets on sale.”

Not everyone shares his assessment. As some point out, the privatisation programme is probably not over: Marseilles Airport is widely tipped as the next hub to come on the block.

Private-to-private deals also hold promise. This year is likely to see two parking auctions face each other head-on: while Ardian and Crédit Agricole Assurances are looking to exit Indigo (formerly known as Vinci Park) Netherlands-based Q-Park is also said to be seeking new owners. Investors seem to think both are good places to park their money: Indigo’s shareholders are understood to be aiming for a 17x valuation; Q-Park is reportedly in the sights of deep-pocketed Asian investors.

Such competitive tension may be pushing more players towards the core-plus and value-added segments. An example of such transaction was provided in 2016 when First State Investments acquired district heating group Coriance from KKR. This year, companies like IDEX, which has a similar business, and public transport operator Transdev may also change hands.

More surprising even, the government may be looking to divest part of Française des Jeux, the operator of France's national lottery games. “The fundamental drivers of that business are like the ones you find in infrastructure,” observes Macquarie’s Brimont.
In infrastructure – as in everything else in France this year – all bets are off.