Australia | Apr 10 2007
By Chris Shaw
For infrastructure companies a key is acquiring assets that offer a dominant market position and solid cash flows, as these can then be engineered into offerings for investors that provide attractive yields and some growth potential.
Macquarie Communications Infrastructure Group (MCG) is a case in point, the company having long been well regarded by brokers for its high dividend yield and secure portfolio, which until last week comprised 100% of broadcast transmission group Broadcast Australia and a majority stake in Arqiva, a provider of transmission services in the UK market.
The company’s latest move is to acquire the UK’s National Wireless Grid (NWG) for GBP2.5bn, a purchase UBS notes will provide some diversification by expanding what until now had been only a two asset portfolio. The upside is the move strengthens the company’s position in the broadcast services market, but the deal is not without its downside.
According to UBS this downside is two-fold – firstly, the purchase is fully priced as on the broker’s estimates it is likely to be cash flow neutral for several years. Macquarie agrees, estimating the price equates to a multiple of 21x historical earnings and 17x when synergies are factored in, meaning NWG certainly does not come cheap.
Secondly, to finance the acquisition the company is reducing its stake in Arqiva to 43.7% from 58.3%, though with the inclusion of NWG that company’s portfolio of assets is now a stronger one.
While UBS has retained its Buy 1 rating on the stock others have not been as generous, both Merrill Lynch and Smith Barney Citigroup downgrading their ratings to Hold from Buy.
The Merrill Lynch move comes despite the broker estimating the purchase will be cash flow positive by FY09 based on expected synergies of GBP25-30m, though the broker points out these synergies have been largely offset by the transaction costs and fees involved in raising the required funds through an issue of convertible bonds.
The broker also notes there remain regulatory issues surrounding the deal, which may also help to erode the synergy benefits expected from the purchase. Citigroup agrees, suggesting the deal may not be finalised for as long as 12 months given the regulatory issues involved.
Assuming the deal goes ahead the broker notes the combined group will then control around one-third of the DTT (Digital Terrestrial Television) spectrum in the UK market, along with 7,000 active wireless communication sites, which in UBS’s view makes Arqiva the logical buyer of NWG.
JP Morgan also agrees the deal is fully priced but the broker notes there are more than just synergies on offer from the purchase as the acquisition offers the growth upside from the NGW assets and in particular the DTT licenses. As the broker notes, this upside is via the increased spectrum under the group’s control, as there remains potential for the current five or six channels to be expanded to as many as 10 in the future, suggestive of significant growth potential given the licenses currently generate high margins.
The broker has retained its Outperform rating on the stock also as an acknowledgement of the potential upside in yield the company offers. Management has indicated the purchase will be accretive for distributions from FY08 and has lifted guidance to the upper end of the previous 5-10% growth range, the broker lifting its forecasts to reflect this revised guidance.
Merrill Lynch is also attracted to the forecast 6.9% yield, while also pointing out the shares are trading in line with its valuation of $6.50.
Macquarie is another to still rate the stock as Outperform, noting the enlarged group creates a major independent wireless business in the UK market, one it expects will be able to offer more competitive products to the various mobile communications companies in that market.
Additionally, it points out the funding arrangement, where Macquarie Communications pays out only $59m in cash, leaving the company with options to consider additional acquisitions in the future. Merrill Lynch agrees, both brokers suggesting the company is likely to look at acquiring Airwave in the future.
In total the FNArena database shows the stock as rated Buy five times and Hold three times, with Aspect Huntley rating it as Avoid. The average price target is $6.98, up slightly from the pre-NWG target of $6.86 but below the median price target according to Thomson One Analytics of $7.13.
Shares in Macquarie Communications closed today at $6.31, down 6c.