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Not all at once

8 September 2014 By Una Galani

Australia’s privatisation push is creating a buyer’s market. State governments are being encouraged to divest their infrastructure holdings. The assets on the block, which include everything from ports to electricity networks, could be worth A$100 billion ($93 billion), according to Infrastructure Australia. That’s equal to almost three-quarters of the total value of mergers and acquisitions involving an Australian target over the past two years. A lack of coordination between states could leave laggards with lousy valuations.

A sell-off makes sense. Following a slowdown in mining investment, Australian unemployment is at a 12-year high. To create new jobs and fuel growth, the federal government is keen to see states flog off infrastructure assets that they control and then recycle the proceeds into new projects. Those that oblige will be able to tap a central government scheme that adds 15 percent to the sale proceeds on a first-come-first-served basis, up to a total value of A$5 billion.

There’s no lack of demand for infrastructure assets in developed markets with established cash flows. Pension funds, sovereign investors, and endowments have combined assets of around $50 trillion and are underexposed to the sector, according to Business 20, a group that produces policy recommendations for the annual meeting of G20 leaders. Yet with interest rates likely to rise in the near term, appetite from trade buyers may wane.

If anything, the risk is of a pile-up as states compete for investors. The number of funds able to conduct due diligence and write large cheques is limited. Big assets on the block include the electricity distribution network of New South Wales, where a 49 percent stake might fetch A$10 billion. Meanwhile, the federal government is also preparing to privatise a number of other large assets including A$4 billion health insurer Medibank. Others like the Royal Australian Mint money printing service may follow.

Assets already privatised this year, such as Queensland Motorways and the Port of Newcastle, have fetched healthy valuations after attracting multiple bidders. But with such strong supply, sellers at the back of the queue may find that buyers call the shots.

 

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