It is a buyer’s market for European infrastructure assets. Troubled European countries – like Greece, Ireland and Portugal – are poised to sell stakes in businesses to comply with the terms of their bailout packages. They follow in the footsteps of European utilities, which have recently sold parts of their transmission networks to comply with unbundling requirements or to shore up their balance sheets. The menu of assets is long and alluring (see table following page) – from Barajas Airport to Bord Gais Energy to Hellenic Petroleum, though appetite for the assets, however, varies greatly.

“Investors will be looking for deals and prioritising assets that allow them the best opportunity to maximise returns on a risk adjusted basis,” says Conor Kelly, managing director at Rubicon Infrastructure Advisors, and a former managing director at Depfa. “Certain assets within the infrastructure asset class are more attractive than others, due to the fact that additional value can be created through achieving operating efficiencies or by capturing potential upside.”

Power up

The energy and utilities sector, whether private-to-private or public-to-private, has the most to offer infrastructure buyers. These regulated assets produce inflation-linked revenues, and usually benefit from an established political and legal framework, representing their position as critical parts of their host countries’ infrastructure. Existing brownfield businesses tend to require low levels of additional investment and, crucially, come onto the open market infrequently.

“Pipelines, water companies and transmission grids are up for sale as their indebted utility owners are seeking to free capital for higher-return activities such as new asset development and entry into higher-growth markets,” explains David Simpson, global head of M&A in KPMG’s corporate finance group.

One high-profile example is E.ON’s 120,000km Open Grid Europe natural gas network. E.ON’s sale of the network has attracted huge interest but has been whittled down to four bidders. The bidders are GRTGas, CNP Assurances and IFM Australian Infrastructure Fund; Fluxys, Global Infrastructure Partners, Caisse de Depot et Placement du Quebec; Allianz, Canadian Pension Plan and Gasunie; and Macquarie, Abu Dhabi Investment Authority and British Columbia Investment Management). The final sale price could be as high as Eu3 billion ($3.94 billion). “The interest in Open Grid shows just how in-demand these assets are, for both bidders and banks,” one banker says.

Fellow German utility EnBW Energie Baden-Wuerttemberg is also looking to sell its power transmission network for Eu300 million ($394.5 million) while the Irish government is reviewing a sale of Bord Gais Energy, which could be worth up to Eu5 billion ($6.57 billion).

“One major trend is the Unbundling Directive, which means pipelines and transmission networks are being sold across Europe,” one financial adviser says. “It means governments and utilities can get the private sector to take on the running of and the capital expenditure associated with infrastructure, plus the asset class is very attractive to investors, as they get control of an effective monopoly.”

Bankers back the assertion, saying that these business are ideal candidates for debt financings. “Bank debt financing remains quite challenging but, in the case of transmission networks, for instance, they are perceived as very solid assets so are pretty bankable,” the adviser continues. “The key challenge is the tenor of the debt, though. Tenors remain quite short, so buyers take on a lot of refinancing risk.”

The other prized asset class is airport-related infrastructure, including both operators like ANA in Portugal, as well as airports themselves, with Athens, Madrid and Barcelona all mentioned as possible candidates. “Airports are visible and saleable assets,” says KPMG’s Simpson. “Sellers are attracted by the possibility of high prices and external funding to develop key national assets. They will only be sold, however, if they have a good enough growth story to attract the high prices demanded by sellers. And that story will depend on the economic outlook.”

Such an array of assets up for sale may, in theory, hark back to the last big wave of European privatisations in the 1990s. Alas, the main challenge remains closing the deals. “The type of asset isn’t the only factor investors will take into consideration when making decisions on where to deploy capital,” Rubicon’s Kelly warns.

Indeed, the problems with the Euro, the bailout reforms, political instability and limitations on banks’ capacity to underwrite big tickets for acquisition debt all play a role in sponsors’ decisions, regardless of the asset type. For instance, while several bankers claim there was initial excitement over the Greek assets, one claims “absolutely nothing has crossed my desk from Greece, Ireland or Portugal and I am not aware of anything in the pipeline”.

Bye-bye to buy?

The sluggish progress with the government asset sales has not helped increase private sector interest. “In the current economic environment there are a number of challenges that governments face when competing for a finite pool of private capital seeking to invest in privatisation and asset sale processes,” Kelly remarks. “These include the currency, the perceived sovereign credit and political risk, economic fundamentals supporting the investment, ability to access debt on commercial terms and likelihood that the government has the political wherewithal and support to actually see the privatisation or sale process through to close.”

Governments fear that they will face criticism for selling assets at knock-down rates, allowing the private sector to capture any increase in value from what used to be public resources. “The process has been slow because it does not feel like the governments have much confidence in putting their assets up for sale,” one adviser observes. “They want to get value for money through a competitive tender and not appear to be selling the family silver on the cheap.”

“In the current environment there aren’t too many examples of assets being over-valued,” Kelly explains. “This is partly because there is a global competition for private capital, continuing uncertainty surrounding global markets and currencies, weak economic indicators and, of course, limited access to liquidity and if available, on more onerous terms, including lower leverage levels. All of which plays a part in lowering price levels and expectations.”

Adds Simpson “... Most of the assets are legacy state ones which need to be operationally separated, given a corporate structure and set on a path to be more efficient and needing social buy-in, i.e. unions, before they can meaningfully compete with private market sales,” he stresses. “Some of the mooted deals will happen and many will not, at least in the short term.”

Investors are nervous about economic and social problems in some Eurozone countries, most particularly those that have put in place bailout-inspired austerity programmes and are under the most pressure to close infrastructure asset sales. “Assets will not be bought if the employees are throwing petrol-bombs in the street,” Simpson suggests.

There remains a great deal of regulatory risk in buying infrastructure assets, even for less distressed countries. Ferrovial bought UK airport operator BAA in 2006, and less than a year later the Competition Commission ordered it to sell several of his most important holdings. BAA has so far sold Gatwick, and has recently agreed to sell Edinburgh Airport to Global Infrastructure Partners for £807 million ($1.3 billion), but is appealing an order to sell Stansted. The retroactive cuts to the Spanish feed-in tariff may have been a convincing sign that its government was committed to austerity. But they provoked howls of protest, and so far unsuccessful litigation, from sponsors.

Governments and state banks could offer guarantees to shore up confidence but financial sponsors in particular may lack the patience to ride out any regulatory or political turmoil. “The appetite of industrial and financial sponsors to invest in asset sales can be very different and is very much dependent on the asset itself,” says Rubicon’s Kelly. “Some will invest as part of a strategic expansion, to access new markets, to derive synergies with existing operations, etc. Generally speaking, the appetite of the financial sponsor, which does not face the same liquidity constraints as some of the industrial sponsors, is growing and they are amongst the most active investors in infrastructure assets or assets that possess infrastructure-like characteristics.”

Fund day

The riskier assets could be of interest to private equity funds, possibly even to those that specialise in turning around businesses, although the assets themselves are not distressed so much as their sellers. Funds with less of a short-term outlook are more likely to be interested, though since some utilities are selling assets without transferring responsibilities for maintenance, technical experience is not a prerequisite. “The ideal deals in this area can often be for the hard assets to be sold while the utility vendors retain the servicing and maintenance revenues, and profits,” says Simpson at KPMG.

Sell-side advisers insist sellers, rather than lenders, are the biggest constraint on the supply of viable deals. “Most bidders are likely to be infrastructure funds rather than recognised companies,” one says. “Funds know that as long as an asset is good they will not be disadvantaged in attracting bank finance to fund any acquisitions. Indeed, the problem is not so much a lack of liquidity but a lack of viable deals, which means the handful of deals could get swamped by banks.”

The leveraged lending market has shown signs of improvement, though sponsors, as ever, decry the lack of bank finance. Government, however, still hopes that other ways of raising funds might be better value for money than outright sales. The Hellenic Republic Asset Development Fund, which is overseeing Greece’s privatisation push, is said to be reviewing asset-backed bond issues as an alternative to entire sell-offs, though it remains to be seen whether bond investors would be any more optimistic about Greek infrastructure revenue risk than an equity sponsor.

But a European bond market has been slow to take off even for conventional private infrastructure assets, outside the UK, and might struggle to monetise infrastructure assets without an equity cushion coming in alongside. High-yield bonds have been picking up in Europe, with issuers such as Polkomtel and Securitas Direct approaching the market. A high-yield tranche was a part of the Macquarie-led refinancing of the Moto motorway service station assets in early 2011, though its recent performance, as a victim of the downturn in UK consumer spending, serves as a good reminder of how infrastructure revenue risk is a real problem, even for debt providers. Bankers are sceptical as to whether such bonds could be deployed during the current wave of infrastructure M&A.

“There has been talk of high-yield bonds on the rise but we are only seeing them put forward when banks refuse to increase their exposure on refinancing,” one banker continues. “For example, when it comes to refinancing many borrowers want to retain the pricing that they received pre-2007 but we now need plenty of equity and sensible leverage.”

A consensus is emerging about which assets will attract which type of buyer. Regulated assets will go to multinational buyers or possibly dedicated infrastructure funds, while strategic assets with greater degrees of revenue risk will go to private equity buyers or local investors. Some governments hope that local entrepreneurs or expatriates with assets offshore may take the opportunity to reinvest their income at home.

“My sense is the further away from Europe you get, the more worried potential investors are,” one expert concludes. “So I think it is likely that much of the investment in places like Greece will come from local sources or family money. Indeed, if you compare it to the previous crises in Latin America and Asia, it was those local investors returning to the markets that were the first movers.”