TPG/Asciano

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TPG Capital is back Down Under with a deal that carries more than a whiff of private equity’s glory days. Asciano, the target, is an infrastructure operator with strong cash flow and a battered share price. Notwithstanding the current straitened times, Asciano was quick to reject the US$2.7bn offer.

Australia’s biggest port and rail operator had a messy birth. The national antitrust regulator demanded that Toll Holdings, the transport and logistics group, spin off its infrastructure assets following its 2006 takeover of rival Patrick. Asciano has subsequently struggled to convince investors because it took on a truckload of Patrick’s debt and failed to deliver on expected earnings.

At the end of last year, net debt stood at A$4.7bn; Credit Suisse estimates this year’s net debt/equity at almost 200 per cent. The share price has performed horribly since last year’s listing, losing about two-thirds of its value. Naturally, the unsolicited bid, by TPG and Global Infrastructure Partners, formed by Credit Suisse and General Electric, helped reverse that trend: the shares on Monday soared 16 per cent to A$4.83, past the A$4.40 offer price.

That, coupled with Asciano’s frosty reception to the proposal, suggest the financial sponsors may need to stump up more. The A$4.40 a share pricetag is well below brokers’ target prices even if it is a rich multiple of 42 times this year’s estimated earnings. Asciano’s assets cater to commodities in hot demand but, as demonstrated by the downward revision in full-year earnings, can still take a beating from events beyond its control such as infrastructure constraints and inclement weather.

The business outlook is mixed: coal and other commodities remain in demand but exports are decelerating globally. These fundamentals matter: Asciano’s debt levels mean the scope for leveraging up further is slim. That makes the proposed deal rather different from those carried out before the credit crunch – and will limit the buyers’ willingness to ratchet up the price.

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