PUBLISHED: 03 JAN 2014 PUBLISHED: 03 JAN 2014 PRINT EDITION: 03 JAN 2014
Anthony Macdonald and James Chessell
Mike Baird is not a swearer. But the NSW Treasurer must have been tempted to let out an expletive or three when he was told how much Industry Funds Management and three other investors had paid for Port Botany and Port Kembla.
It was the morning of April 10 and Baird was in the boardroom of his offices in Governor Macquarie Tower, in the heart of Sydney’s central business district. There is a good view of the harbour from the 36th floor and the drizzle of the past week was starting to clear up.
In the room were Morgan Stanley’s Richard Wagner and Julian Peck, who were Baird’s key advisers on the deal. They had spent the past three days locked in a room in the investment bank’s offices on level 39 of the nearby Chifley Tower, sorting through three final offers. The bids were lodged at 9am on the Monday. One stack of documents even arrived in a box shaped like a shipping container. Each included an envelope with a final price – everything else was supporting material. Each was marked with a code name – Hobson, Walton and Gilbert – given to the three consortia, named after skippers and boats from the first fleet. A fourth bidding group, Sinclair, had failed to submit an offer after dropping out midway through due diligence. The Botany deal was called Project Pembroke, and the Kembla sales process was dubbed Project Belmore.
The two highest offers were incredibly close, which meant the bankers and lawyers from Minter Ellison sifting through the piles of documents needed the full 72 hours to ensure they would recommend the best offer. Wagner and Peck had been careful not to talk up price in the conversations with Baird. Almost 18 months earlier the Treasurer had told the NSW parliament that about $2.5 billion was a reasonable number when Botany, Australia’s second largest container port, was the sole asset up for sale. After receiving first-round bids in December, Baird thought a price with a “three” in front of it was possible, but everyone was aware an indicative offer was non-binding.
So when Wagner told Baird that IFM and its co-investors, AustralianSuper, the Abu Dhabi Investment Authority and QSuper, had paid $5.1 billion, the Treasurer was gobsmacked. “You are kidding,” he eventually said. “You are kidding.” Not only was the price much higher than expected but the two leading bids were separated – in terms of the headline number – by just $14 million. It was an absurdly close finish for a multibillion-dollar deal.
The transaction would not be finalised until Friday morning. Baird needed approval from Premier Barry O’Farrell, who was coming back from a presentation on the south coast. But the significance of the deal was already beginning to dawn on the Treasurer. Not only had the privatisation raised far more money than expected, but it had reshaped the landscape of infrastructure deals in Australia. Normally a predictable asset such as a port would fetch a multiple of 15-to-20 times operating earnings. Botany and Kembla had gone for an eye-watering multiple of 25 times.
There is still heated debate about whether IFM overpaid. But of all the deals done in 2013, Port Botany was the most influential.
It set the tone for a flurry of high-priced infrastructure transactions. Canadian pension fund Caisse de dépôt et placement du Québec paid about $1.4 billion for a 27 per cent stake in Port of Brisbane, suggesting the asset would be worth almost $6 billion. In 2010, less than three years earlier, the Queensland government sold the entire port for just $2.3 billion. The Botany sale has also emboldened state governments to privatise more assets. Baird has already kick-started a sales process for the Port of Newcastle, and the WA and Queensland governments are pondering further asset sales including roads and ports.
Selling the proceeds, not the sale
Mike Baird had not become Treasurer wanting to sell 99-year leases for two of the state’s biggest ports. Privatisation had become a dirty word in NSW, clouded by ideology. Attempts to sell off the state’s electricity assets including the poles and wires had been violently opposed by unions, wreaking political havoc with former Labor premiers Morris Iemma and Nathan Rees. O’Farrell has so far resisted pressure to go down the same path, although less politically sensitive generation assets have been put on the block. But it became clear to Baird as he prepared for his first budget in September 2011 that the government was going to have to make a tough call.
He was already committed to selling the new desalination plant at Kurnell (which was bought for $2.3 billion by Hastings Funds Management and the Ontario Teachers’ Pension Plan in May 2012). But revenue in the form of GST payments from the federal government and mining royalties were down more than $2 billion, adding to the state’s debt load and putting its credit rating in jeopardy.
So he took the idea of selling Port Botany to cabinet. “It was universally accepted,” he says. “The fiscal bottom line is we didn’t have much choice.” Unlike the poles and wires, this privatisation (once Kembla was included) affected about 80 workers. Nobody had pitched a ports sale to Baird. But superannuation funds had demonstrated an appetite for defensive assets with reliable cash flows, making Botany a logical target. Nevertheless, it was a still sensitive subject. Particularly when it was announced in June 2012 Kembla would be added to the sales process as part of Baird’s second budget.
Baird argued to his colleagues that previous governments had not “sold” the benefit of the privatisation. “You are selling what you are doing with the proceeds as much as anything else,” he says. In this case it was freeing up money to pay for new roads, rail, health or education. The Restart NSW infrastructure fund had been established a couple of months before the first budget. One of its priorities was to invest the proceeds of privatisation.
As well as the political salesmanship, Baird had three practical goals. He was a banker of some 17 years before entering politics in 2007, working as an analyst for Deutsche Bank on infrastructure deals. More than anyone he knew the importance of a “clean sale”, with no residual liabilities for the state. He also wanted the sale to go through Parliament. In the past, under Labor, sales processes such as the gentrader contracts, where power from NSW-owned generators were sold to big electricity retailers, were designed to get around Parliament. “This one I wanted to go through so everyone was on board,” he says.
This meant negotiating with MPs who controlled the balance of power in the upper house, including the Shooters and Fishers Party. One of the main reasons the O’Farrell government reluctantly supported hunting in national parks was to secure the support of legislation to allow privatisation of infrastructure assets. NSW Opposition Leader John Robertson opposed the sale of the ports. (His counterpart in Victoria, Daniel Andrews, has a different view, announcing in November he was open to privatising the Port of Melbourne and would set up a similar infrastructure fund with the proceeds.) Finally, Baird needed competitive tension in the sales process. One of the problems with the Port of Brisbane sale was the shortage of cashed-up consortia vying for the asset. He wanted this process to be different.
Baird assembles deal team
Baird’s two main Treasury point people on the deal were Tim Spencer, who ran many of the privatisations in Queensland, and Richard Timbs, a former Macquarie Banker who had worked on the other side of deals buying assets for the investment bank. Their first job was to choose a financial adviser to prepare a scoping study.
The combination of a new government and a weak period in the mergers and acquisitions cycle made for plenty of interest. More than 14 investment banks pitched for the role, with Morgan Stanley chosen from a shortlist of four. Each bank presented to a panel of bureaucrats in late 2011. Interestingly, the three banks that worked for the Queensland government on the Brisbane sale – Bank of America Merrill Lynch, Royal Bank of Scotland and Rothschild – made the shortlist but missed out. Morgan Stanley had just four bankers at its pitch. Wagner and Peck had advised an underbidder on the Brisbane sale and their presentation was all about improving on past experiences. They argued that it was possible to increase government certainty by increasing the amount of information available to the bidders. One criticism of the Brisbane sales process was that there was a lack of detail in the documentation, allowing doubts to affect the judgment of bidders. Morgan Stanley said it was critical that interested parties were comfortable with the revenue projections for Botany, allowing them to pay close to their cost of capital. As an example, the bank proposed commissioning a consultant to prepare a detailed study about the NSW economy. Baird agreed to an unusual fee structure to incentivise Morgan Stanley on price, terms and, crucially, generating competition by maximising the number of bidders.
Morgan Stanley was awarded the gig on December 14. A team of bankers began work immediately. Deloitte Access Economics were hired to do the economic report. Minter Ellison did the legal work. The aim was to provide buyers with up to a dozen reports. “No white space” became the mantra. The scoping study was due in May but Baird threw a spanner in the works when he asked the team to consider whether the smaller Port Kembla should be added to the deal or sold separately. Port Kembla not only accounts for the much of the state’s car imports but takes the container overflow from Botany. Morgan Stanley argued the owner of Botany would have an unfair advantage given the mismatch in size, diminishing the value of Kembla if it was sold in a discrete process. Treasury agreed.
Even as the process was officially launched in July, Wagner, Peck and Timbs were already in the air for a roadshow. All three took turns to talk through a 50-page presentation with prospective investors in London, New York, Canada and Asia. With Europe still suffering from the ill-effects of the credit crisis and a lack of big ticket infrastructure deals, they were heartened by the response. But the trip was not without its hairy moments. Wagner and Peck arrived in Hong Kong at the same time as Typhoon Vicente, one of the biggest storms to hit Southern China in years. Unfortunately, they were booked in on the 109th floor of the Ritz Carlton. The building was only six months old and swaying in the 200km/h winds.
The roadshow seemed to do the trick. Expressions of interest were called for in September and bidders began forming groups.
The combination of IFM, Abu Dhabi Investment Authority and Global Infrastructure Partners (advised by UBS and, later, Lazard) formed early and was given the name Walton. QSuper’s 15 per cent stake was managed by GIP.
Also an early mover was a JPMorgan/Royal Bank of Canada-advised consortium of Hastings and Ontario Teachers Pension Plan. Fellow Canadian heavyweights Borealis Infrastructure and CDPQ joined the group, dubbed Hobson.
QIC teamed up with the Future Fund, having successfully bid together for Port of Brisbane a year earlier. Also in the group was Canada Pension Plan Investment Board, which had been actively seeking Australian deals. This group, advised by Macquarie and, later Gresham, was called Gilbert. A fourth consortium was headed by Citi Infrastructure Partners, which owns DP World Australia, one of the Port Botany operators. There were clear competition issues. While Sinclair, as it was named, attracted plenty of interested partners, it struggled to convince backers it could overcome the issues.
IFM’s group entered the auction as underdog. Its two key rivals, the Canadian-backed groups Hobson and Gilbert, were more worried about each other, not realising the biggest threat was the local money manager which secured late support from the giant AustralianSuper. IFM, which owned 45 per cent of the consortia, would later write a $1 billion-plus equity cheque, one of its biggest ever. In doing so, it reminded rivals it was a serious global infrastructure player.
Bidding heats up
These four bidders were shortlisted after submitting solid indicative bids in December. The steering committee headed by Spencer was pleased but reminded themselves the offers were not binding. There were two important reasons the process had attracted four seemingly serious offers. First, the team had made the decision not to allow consortia to lock lenders into exclusive deals. This enabled the likes of ANZ Banking Group to set up different “trees” (separate deals teams in different states) to work on multiple bids.
The second reason was Baird’s decision to scrap a cap limiting the number of containers that could be moved at the ports. The antiquated rule was even more silly, given the NSW government had just spent $1 billion expanding the port by a third. This meant bidders were offered a near monopoly on container shipping in NSW with increased capacity. Port Botany handles almost three-quarters of the two million containers that move through the state’s ports, transporting everything from furniture to heavy machinery.
Baird continued the political sales process. This included meetings with local councils and unions. There was plenty of opposition in the Illawarra over the Kembla sale. During one visit to the port, Baird and his ports minister, Duncan Gay, were bailed up on a balcony by angry protesters. They were promised $100 million from the proceeds of the sale for infrastructure in the region, but many locals argued it was not enough.
With the indicative bids submitted in December, the government team handed over massive information memorandums(“no white space”) and took a break over Christmas. If that wasn’t enough material, a virtual data-room was set up in January, with access to lease contracts, historic financial information, employment contracts and board papers.
A month later four groups of up to 40 analysts and engineers from each of the bidding teams could be seen touring the ports. They were ferried around in buses and listened to presentations from management. For the management it was almost a job interview. There would be no socialising on these tours. Everything said by management needed to be verified and pass strict probity checks. Hours of training went into the presentations.
The deal of the year
There was much excitement as the bids arrived at Morgan Stanley’s Chifley Tower office early on Monday, April 8. But it was midday before the state’s probity officer had cleared the bids and allowed the bankers and lawyers to start trawling through the documents.
Only the bankers and Treasury officials were allowed a look at the price, while everyone else set to work on the supporting documents. Morgan Stanley briefed Spencer late on Monday and presented their recommendation to a steering committee on Tuesday night. Walton’s bid was $14 million higher than Hobson, but well ahead on terms. They could call the two parties together to submit a last and final offer or take the $5.1 billion on offer. Each bid was finely tuned to the existing financial market conditions, and some uncertainty in North Korea had markets on edge. The advisers knew Baird was after a clean and quick deal and recommended accepting IFM’s bid. The steering committee agreed.
After Morgan Stanley briefed the Treasurer on Wednesday – when Baird was lost for words – he phoned the Premier, who was equally astounded.
All that was left was to tell the winner. On Wednesday night, Morgan Stanley phoned IFM’s team, who were bunkered in UBS’s Chifley offices, some 23 floors below. They made their way down the lifts to brief the bidder. Wagner, Peck and Timbs walked in empty-handed, no expressions on their faces. It was clear from the IFM’s team reaction that they were expecting the worse. IFM had a big group working on the deal, headed by Julio Garcia and global infrastructure head Kyle Mangini. Also in the room was UBS’s team, led by transport infrastructure banker Jarrod Key, and Lazard managing director Andrew Leyden. Instead, Wagner told them that they were in front and Baird wanted to sign an agreed deal on Friday.
The bidder went to work on Wednesday night and continued non-stop through Thursday, thrashing out the final detailsat the Aurora Place offices of Minter Ellison.
After 36 hours straight, a deal was ready to be signed. Morgan Stanley’s bankers stopped by Baird’s office at 7.30am on Friday, collecting the Treasurer for the 8am signing. The bidder was given four hours to organise any interest rate swaps, before the deal would be announced at NSW’s Parliament House on Macquarie Street. Baird proclaimed the record-breaking price, while IFM chief executive Brett Himbury and his infrastructure head Mangini said they had bought a quality asset.
Baird’s team were exhausted after a hectic week finalising the 18-month transaction. A group of about 20 bankers, lawyers and Treasury officials headed across Macquarie Street to Sydney’s Botanic Gardens Restaurant to celebrate, before going home to get some sleep. Morgan Stanley hosted drinks a week later for some 200 people involved in the deal at their offices. Baird was on hand to thank everyone.
One brings two, three, four . . .
For the seller, Port Botany and Port Kembla will be remembered for the hefty $5.1 billion price. The buyer will remember out-manoeuvring two other strong bidders to secure a monopoly asset.
But, perhaps most significantly, the deal’s legacy will be unlocking some $100 billion-plus of other state-owned assets and changing the attitudes of governments and the community to privatisations.
“I think there is much more openness to privatisation,” Baird says. “The national narrative has opened up.” He pointed to Victoria where the Labor opposition is exploring privatising the Port of Melbourne. “The knock-on effect is, hopefully, very positive.”
The Australian Financial Review
BY ANTHONY MACDONALD