Diverging fortunes of infra M&A

The favourite argument of investors buying into infrastructure assets is their resilience; it’s the classic suite of high barriers to entry, (quasi-)monopolistic services / assets, inflation insulated, long asset service life.

Yet, another quality often seen among infrastructure’s winning attributes has been pointedly upended with the ongoing worldwide Covid-19 Pandemic: low elasticity of demand.

Indeed, elasticity of demand is proving to be burdensome for almost all infrastructure assets: transport has seen a monumental collapse whilst telecoms has seen significant upticks.

This divergence promises a number of short- and long-term outcomes for the sectors positively and negatively impacted.

Industry sources have suggested that M&A processes are likely to continue for those assets which continue to see strong demand, in spite of, and even because of, the pandemic: telecoms, water, energy.

Meanwhile, those with evaporating or uncertain demand look increasingly likely to be kicked down the road – transport, oil, and oil-related products.

That’s yer lot

Talk of an “apocalypse” in aviation interest groups is not uncommon at the moment, including the International Air Transport Association which is forecasting a $252 billion hit from lost tickets sales if travel bans remain in place for three months.

Many airlines have cut capacity by 75%.

Meanwhile, airports are adding their voices to the chorus of air travel industries imploring governments to help them shoulder the burden.

ACI Europe, the airport industry trade body, said that European airports were facing 700 million fewer passengers in 2020, equivalent to a €14 billion ($15.14 billion) decline in revenue.

The situation is already having a material effect on European airport M&A. A source IJInvestor spoke to in February said that GIP was holding off on a sale of Edinburgh Airport until the end of 2020 at the earliest in response to coronavirus and US-Chinese trade issues.

It now seems even more likely, in light of recent development, that a sale on the asset will not begin until 2021.

The major anticipated airport sale in recent times – ADP – was shelved earlier this month despite having overcome political hurdles. A French Government spokesperson argued that “the current market instability demonstrates that market conditions are not at all favourable to any kind of privatisation, and particularly one such as ADP”.

As for processes already underway, IJInvestor reported on several bidders planning to withdraw from the acquisition of a 30% in Athens Airport. One source close to the process still expected binding bids to be made in the summer, however.

Oil industry sales processes are also suffering from a lack of appeal as an unhappy confluence of events (coronavirus and OPEC disagreements) conspired to push the cost of Brent crude off a cliff. In January prices were fetching not far of $70 a barrel. 

The price at the time of writing was $26.36.

Estimates suggest that 25% of global consumption could vanish in coming months.

Oil majors have already moved to slash capital expenditure and investment budgets by several billion.

Long-term prospects for oil do not fare much better with assets linked to a commodity which are increasingly losing favour with investors. In addition, the societal experimental shift in working remotely may encourage more such behaviour in future, further cutting into oil consumption.

In spite of this, Premier Oil has remained bullish on the acquisition of North Sea assets it plans to acquire from BP and Dana Petroleum despite pleas from its largest creditor.

A court hearing in Edinburgh brought by the latter last week on the matter will be published in due course.

Terminals may still be attractive assets in these times, as they are expected to fill in a matter of months, but the horizon beyond that is unclear.

To that end it is uncertain if the launch of Puma Energy’s UK assets will proceed, likewise with those of Zenith Energy which is selling storage in Ireland and the Netherlands, and was anticipated to launch this quarter (Q2).

Resilience

Even as oil consumption drops, however, bandwidth and data consumption are exploding as people migrate to working patterns heavily reliant on communication networks.

Fearing a strain on networks, the EU requested streaming and video services like Netflix and YouTube to limit quality levels to ensure smooth functioning of the internet.

Mobile networks have seen 50% increases in data being processed.

Several processes are thought to continue despite the outbreak including niche fibre business Glide, the sale of Orange’s fibre networks in France to name a few.

Arguable the ultimate infrastructure asset, water, is also unlikely to experience any delays to processes beyond those already established, including the sale of Kelda Group (Yorkshire Water) which was expected in Q2.

All sales are likely delayed owing to a dispute around price determinations published at the end of 2019.

Still, the sale of Agua Barcelona is expected to proceed with Goldman Sachs and BAML said to be running the sale, which is thought to attract institutional investors owing to modest growth rates.

The 2019-20 Coronavirus is certain to have a number of enduring impacts on many facets of life. It remains to be seen whether the threat of a repeat of such an incident induces infra investors to change tack and opt for assets sturdy enough to weather global pandemics