Current M&As: EPF-UEM bid to acquire Aussie toll

I read with great interest the news today about EPF&UEM putting in a bid to acquire a toll operator out of Australia. The cost is expected to be in the region of A$5 billion to A$6 billion; a lot of money. I wonder how does it fit with the typical M&A framework.

1. Must make sense strategically

This is an inorganic, horizontal, cross border expansion exercise.

UEM is already the largest toll owner and operator in Malaysia with PLUS under its belt.  Expanding organically in Malaysia would take years and bidding for a new concession is not easy (competitive) as there are multiple local parties that can now build and own highways. Funding for a new local concession is not so much an issue as the banks are willing to provide the capital with the right risk mitigating measures in place. So, organic growth would be very slow, provided it could land the concession in the first place.

UEM has the full spectrum of toll ownership and operation in place -s omething we can certainly be proud of. As such, pretty much  anything that it would acquire in the toll business would be a horizontal move.

Thirdly, it is a cross border transaction, meaning UEM and EPF are looking at acquiring an assets which is outside our borders. It means that they would have to 'buy' foreign currencies, a lot of it, to pay for the purchase/acquisition. Which means that the income from the acquisition is also going to be in a foreign currency, namely Australian Dollar. All of which could be summed up in a phrase: currency risk.It is a risk because EPF and UEM needs to pay its shareholders in Ringgit Malaysia.

In doing this, EUM and EPF is basically banking on the hope that the Aussie Dollar would not depreciate  during the time it holds the investment in the Australia. Well, no one can predict the future and this kind of investments has a time horizon running into years. It is a risk that EPF and EUM has to swallow.

Of course there are mitigating measures like financing the purchase purely in Aussie Dollar and making the repayment in Aussie Dollar out of the income of the toll company which would be in Aussie Dollar. That portion of asset would have a natural hedge, leaving only the pure equity portion of EPF exposed to currency risk, albeit at a much smaller amount.

Of course there are plenty of intangible assets and benefits like transfer of knowledge from Australia to Malaysia (CIMB getting international exposure too) and increase international profile that we could not put in dollar and cents.

Based on the above, in my view, the acquisition does make a great business sense for the likes of UEM and EPF.

2. Is the price right?

The right price is a combination of cash flow, intrinsic value and realized synergies. We will look into this if we get more information on the acquisition. Right now we only know that the deal is expected to cost between A$5 billion to A$6 billion. 

3. Would they be able to make it work?

This is the most critical part of all. All the right strategy and the right price would mean a big fat zero if it is not done the right way.

What is the right way to make it work? Well it involves the ability of EPF and UEM to drive the new assets, navigating through the legal and cultural nuances of the company and the country. This is people management and we hope UEM has the people and experience to carry out the task in hand.

That is also when a great due diligence would come in handy.

We wish UEM and EPF the best of luck.

---from the Star---

PETALING JAYA: The Employees Provident Fund (EPF) and UEM Group are said to be bidding for Australian state-owned toll road company Queensland Motorways Ltd later this month.
Bloomberg reported yesterday that the EPF and UEM were planning for a final joint-offer for the toll road business. The report quoted sources as saying that the EPF and UEM would be advised by Deutsche Bank and the CIMB Group.
The newswire also reported that Singapore state investment firm GIC Pte Ltd would bid for Queensland Motorways with IFM Investors and Borealis Infrastructure Management and that the offer may exceed S$6bil (RM15.57bil).
It has also been reported that the bidders for Queensland Motorways include a consortium led by Australia’s Hastings Funds Management, which also includes sovereign wealth fund the Kuwait Investment Authority, Spanish toll road operator Abertis Infraestructuras and Dutch pension fund APG Algemene Pensioen Groep.

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According to reports, the Queensland Investment Corp’s sale of Queensland Motorways is expected to raise between A$5bil and A$6bil, making it the country’s biggest infrastructure deal this year. Final bids are due by April 22.
Queensland Motorways manages a 70km network of tolled roads, bridges, tunnels and infrastructure, including the Go Between Bridge, CLEM7 tunnel, Gateway, Gateway Extension and Logan motorways.
The highway infrastructure company is owned by the state’s Defined Benefit Fund (under the management of QIC Global Infrastructure).
In 2012, an UEM-EPF joint venture in a RM23bil deal completed the privatisation of PLUS Expressways Bhd, the operator of the 772km North-South Expressway, as well as seven other highways in the country, including the Penang Bridge.