Toll road operator shifts into reverse

June 20, 2008

Scott Rochfort, The Sydney Morning Herald

TOLL road operator Transurban has become the first of an expected long line-up of major infrastructure companies to go to the sharemarket for a handout, after it yesterday announced plans to raise around $1 billion in capital in an effort to reduce the level of debt on its balance sheet.

In a stark reversal to Transurban's deliberate strategy of gearing-up its balance sheet under former chief executive Kim Edwards in late 2006, the group's new CEO Chris Lynch said the model of using debt to fund distributions was "not sustainable in this market".

Advocating a "new investment proposition to the market", Mr Lynch said the increased cost and difficulty in raising debt meant the company needed to return to a "more basic business philosophy".

"This is more a fair dinkum business that we're talking about here. What we've got are great assets and we've got strong cash flows that will grow coming off [the equity raising]," Mr Lynch said.

Transurban, operator of Sydney's M2 motorway and Eastern Distributor and Melbourne's CityLink, maintained its guidance of a 58c payout this financial year.

But in a rude shock to Transurban unit holders reliant on the distributions paid by the company, it said distributions would fall to 22c next financial year.

But Mr Lynch stressed the capital raising and new distribution policy would put Transurban on a sounder footing to allow it to fund new initiatives, such as Vancouver's Port Mann Highway project for which it is shortlisted.

"We'll have a lower yield than we would have if we targeted the aggressive debt-based distribution," he said.

"But we'll also have a much better growth story because we'll have an underlying business that can do some things other than figure out how it's going to feed this big distribution."

Transurban said a placement of 120 million shares managed by UBS would be fully underwritten by the Canadian Pension Plan, with which it has partnered several toll-road projects.

A further 75 per cent of the group's planned $239 million (29c per security) second half distribution reinvestment plan has been underwritten by UBS, and up to $100 million of stock will be offered to retail shareholders via a share purchase plan. The purchase plan will be capped at $5000 per unit holder and at a 2.5 per cent discount. In all, the raising will represent about 16 per cent of Transurban's current market value.

Transurban shares remained in a trading halt yesterday but the move was enough to trigger a sell-off in other toll road operators, such as ConnectEast, the owner of Melbourne's yet-to-open EastLink. Its shares plunged to a new low.

Macquarie Infrastructure fell 24c to $2.68, while the ports operator Asciano plunged to a new low of $3.32 on concerns it could be forced to raise capital to ease its crippling debts.

It is less than two years since Transurban started loading more debt on to its balance sheet.

At the group's annual meeting in 2006, Mr Edwards argued the re-gearing of Transurban's balance sheet would not raise its cost of debt.