Mixed Opinions On Benefits Of Alinta Acquisition For SP Ausnet

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This story features SPARC TECHNOLOGIES LIMITED.
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By Chris Shaw

It should be an interesting meeting next month for SP Ausnet ((SPN)) when shareholders vote on the company’s proposed acquisition of the Alinta assets, which will require an equity issue of more than $3 billion.

The issue is whether or not the acquisition offers benefits for the company, Credit Suisse suggesting it is difficult to see the upside as the deal only offers an increase in distributions from FY09 if debt is used to fund capex and will require a gearing up of the whole company.

The broker also argues the estimated synergy benefits are likely to be regulated away in the medium-term, while cash flow will also be significantly diluted given the size of the equity issue required to fund the purchase.

Sharing these concerns is JP Morgan, the broker estimating cash flows will be diluted by more than 30% as a result of the deal while distribution coverage will fall from 79% now to just over 60% post the acquisition. The analysts also question the magnitude of the savings to be generated by the deal as they too takes the view regulators may attempt to compete some of these away.

Given the dilution from the equity issue (with around $1.5 billion to be raised in the market, Singapore Power agreeing to take up its $1.5 billion entitlement) the analysts see few share price catalysts in the short-term, so they retain their negative view on the stock.

Taking an opposite view is UBS, the broker being in favour of the deal as it sees SP Ausnet as the natural owner of the assets, though it concedes the company is paying a full price for what it is acquiring.

On the broker’s estimates the company should be able to achieve around $90m in cost savings from combining the assets with its existing portfolio, while the growth in assets under management offer scope for this division to generate better returns and to increase market share in what is a $5 billion market.

The broker points out there is already some evidence the asset management operation is developing as it estimates it has grown from effectively zero ten years ago to likely around $225 million by 2010.

Macquarie argues the deal may not go ahead as there is a chance shareholders will vote against the deal, which should see the stock trade back up to its pre-acquisition value of $1.40-$1.50 per share.

Given the uncertainty as to whether or not the deal proceeds the broker retains its Neutral rating, which is the average rating according to the FNArena database as it shows three Holds, two Buys and two Sells.

Credit Suisse points out its Buy rating is based on the current configuration of the company and this could change if the deal proceeded, while Merrill Lynch has a Sell on the stock given the high price being paid for the assets and the refinancing risk that results.

The average price target on the stock is $1.43, which compares to a current share price of $1.24. As a basis for comparison Macquarie estimates a post-transaction valuation on the stock of $1.28, while its pre-deal DCF valuation is $1.39.

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