Abertis better off without Penn Pike at $12.8b - $11b highest prudent bid, analyst

October 1, 2008

Abertis is better off not having had its $12.8b accepted for the Pennyslvania Turnpike concession, according to a leading European concessions analyst. In an email this morning Steven Fernandez, who follows concession stocks for Exane BNP Paribas says that the deal was generally perceived in European investment circles as too expensive for Abertis' good.

Exane BNP Paribus is a large European securities firm head-officed in Paris.

Internal Rate of Return (IRR) on the Penn Pike project was estimated at only 9%, below the rate at which Abertis was trading, so consummation of the deal would logically have dragged the company's value down somewhat.

In an optimistic "blue sky" setting the offer price of $12.8b was justifiable, Fernandez writes, but in a more normal and cautious scenario the concession would be valued at about $11b.

Fernandez calls the debt that Abertis would have incurred to take on the Penn Pike at $12.8b a "dramatic increase."

"The financing facilities that would have been used in the lease were very short term (1-yr equity bridge loan + 3-yr mini-perm facility). Even if the group had been able to secure attractive financing terms at the time they won the tender, current market conditions would have certainly added to the financial costs thus potentially eroding the IRR. Now, hopefully by the time the company had to roll-over its debt... or secure permanent financing facilities, the credit market would have improved. However we believe that investors would have shied away from the stock in the face of a potential refinancing risk."

The analyst writes that despite this Abertis had secured funding and was capable of financing the deal. It only withdrew because of what he called "a very very veeeeeery long" legislative process to gain approval. (Europeans find it difficult to believe that Americans will not soon do the kinds of toll concessions they have been doing for decades.)

Fernandez says Abertis will concentrate on Florida, Georgia, Virginia and other states more hospitable to investor capital being used for tollroads. They will also bid on airports and telecommunications projects.

Abertis win of the Penn Pike procurement even though it wasn't consummated has added to the company's credibility in future bidding, he says.

Credit Suisse analyst also says pullout positive for Abertis

Robert Crimes a London-based analyst at Credit-Suisse also thinks the pullout is positive for Abertis shareholders.

"Whilst we believe the project had a reasonable chance of creating value over the longer term the market was concerned about the near term outlook for traffic growth, the absolute size (especially a $3bn equity cheque) and the high cost and relatively short duration of the debt package. Our (estimated) IRR of 9.3% was dependent on an additional $3bn of leverage in 2011."

Harsh words from US Congressman Peterson, northern PA

US Rep John E Peterson, who represents a  large slab of northern Pennsylvania had harsh words for the state legislators:

"For our legislative leaders to simply brush aside - and not even consider - the Governor's Turnpike lease option in an effort to save the patronage ridden Turnpike Commission and continue to line the pockets of friends and family is appalling."

The Republican said he found most troubling the state leadership's reasoning for not considering the Turnpike lease option:

"After more than five months to review and debate this proposal, the leadership claimed there was not enough time on the legislative calendar, and some have referred to it as a 'fire sale'. Both claims could not be further from the truth."

Peterson said that in today's economy the chance of any future bid coming close to the $12.8b that Abertis-Citi offered is "slim to none."

"Once again, the scandal ridden Turnpike Commission managed to prevail because of the lack of leadership and moral compass in Harrisburg... It's time for Harrisburg to get back to the people's work and find a viable solution to the looming transportation funding crisis.  Use highway dollars for highways and allow for open and honest debate on all legislation - even if it puts the Turnpike Commission out of business."

Brimmeier reaction

"This is good news for Pennsylvanians, the lease being pulled back," Turnpike Commission CEO Joe Brimmeier is reported by local media to have said.

"All the experts said it was a bad deal and the money the lease would have generated would have evaporated within 15 to 18 years, leaving Pennsylvania out of money with 60 years remaining."

Act 44, which provides $1 billion a year to the transportation needs of Pennsylvania, was a much better long-range deal "that can be amended."

"If we would have had the lease signed, Lord only knows what would have happened," Brimmeier is quoted.

Abertis share 59%

Abertis group share in the project was around 59% to 41% for Citi. Abertis' management which would have managed the pike also took the lead in the unsuccessful effort to push the case with state legislators.

TOLLROADSnews 2008-10-01

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