Brookfield’s Big Haul
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Usually when a company announces that it is about to undertake a myriad of strategic initiatives it more often than not means that the current approach just isn’t getting the job done. Further, when they announce they are raising capital to pursue these strategic initiatives, it is done at a discount to the current share price because they need to money to shore up their capital base. That is of course when the company’s former plan wasn’t working. In the case of Brookfield Infrastructure (NYSE: BIP), their announcement that they were participating in several strategic initiatives and raising equity is all part of a plan that’s been working very well.
Brookfield Infrastructure has operations in utilities, transport and energy and timber that provide critical infrastructure across the globe while delivering great returns to unit holders. These businesses are not among the more exciting but they sure get the job done. Now Brookfield is doubling down through a series of strategic initiatives that will grow two of their platforms while shrinking another.
They’ve announced that they and their institutional partners are going to acquire the remaining 45% stake in the Autopista Vespucio Norte toll road in Santiago, Chile. Brookfield will be investing $165 million in the deal, which will give them a 51% stake in the asset with their institutional partners controlling the other 49%. The business has great long-term growth characteristics along with inflation indexed increases, volume increases and annual escalators. Not only that, but who wouldn’t want to own a toll road -- just sit back and collect the cash.
In conjunction with the toll road acquisition they announced they were buying an 85% stake in Inexus for $465 million. This UK-based company is one of the largest independent providers of gas and electricity connections in the country. Brookfield is paying $15 million up front and an additional $40 million contingent payment with the balance of the funds going to recapitalize the business. They plan on merging it with their UK regulated distribution operations making it one of the largest owners and operators of installed connections in the UK. It is a very stable, predictable and boring business that generates steady cash flow.
Are you still with me? Good, because we’re not done yet. Brookfield also announced that they are part of a consortium that is in exclusive discussions to acquire a 60% interest in Brazilian toll roads. If successful, Brookfield Infrastructure would invest $250 million in the venture. The total value of the deal is for $1.7 billion and represents 3,200 worth of toll road concessions. This potential acquisition is for a much larger network than their Chilean toll road, which is just 33 kilometers. Again, who wouldn’t want to own a toll road, especially in a fast-growing, export driven emerging market.
For those scoring at home, that’s $880 million worth of assets that they’re looking to add to their global platform, which is quite a bit to swallow for this $4.58 billion company. Instead of just whipping out their corporate credit card, they are planning to raise capital and sell some of their other assets to pay for this buying binge. It’s their conservative balance sheet management that’ll serve investors well over the long term.
To get the deals done, they are planning a $450 million equity offering, of which Brookfield Asset Management (NYSE: BAM) has already committed to purchase 30% of the newly issued units. They want to maintain their 30% ownership in the company and need to put up some cash to do so. As that only represents half of the needed funds, Brookfield Infrastructure is looking to sell some assets pay for the rest.
The only assets they mentioned specifically that they were willing to sell are some of their timber assets, which confirms what was alluded to on the Plum Creek (NYSE: PCL) conference call. On the call their CEO said, "I haven't heard about Brookfield, but my guess is that's what they might do is take some off the table and redeploy the capital in an area where they can even get a higher return. So I think it's just good business, good capital allocation." Well, now we know what they’ve found that’ll earn them a higher return.
Brookfield expects to close these strategic initiatives by the end of the fourth quarter and they are expected to generate long-term returns of 12-15%. Those great long-term returns will flow more cash to unit holders enabling them to grow their current 4.5% distribution yield. I think that Brookfield Infrastructure is a great company to own for the long haul.
latimerburned owns shares of Plum Creek Timber Co. and Brookfield Asset Management. The Motley Fool owns shares of Brookfield Infrastructure Partners. Motley Fool newsletter services recommend Brookfield Asset Management and Brookfield Infrastructure Partners. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.