- THE AUSTRALIAN
- JUNE 21, 2013 12:00AM
MIKE Baird could not believe the figure. It was 7am on Wednesday, April 10, and the NSW Treasurer was already at work on the 36th floor of Governor Macquarie Tower in Sydney’s CBD.
His bright corner office looks north and east, with views over some working parts of Sydney Harbour. Yet Baird’s attention was focused to the south. He was closing the sale of leases over Port Botany, Sydney’s main trade gateway, and the smaller Port Kembla, 90km down the coast.
Eighteen months earlier, Baird had told the NSW parliament he expected the sale to raise about $2.5 billion. But now his key adviser on the deal, Morgan Stanley’s Richard Wagner, was telling him a group of superannuation investors led by the Melbourne-based Industry Funds Management was offering more than $5 billion.
“My jaw dropped,” Baird tells the deal, in his first in-depth interview on the ports sale. “If you had asked me what in my absolute wildest dreams would be the best price the state would receive, it would have been in the high threes.”
Baird, a former banker who worked with NAB and HSBC before following his father Bruce into politics six years ago, was just about to pull off the biggest deal of his career.
Appointed Treasurer when the Coalition led by Barry O’Farrell swept into office in 2011, the boyish Baird had been asked to find a way out of a financial straitjacket that threatened the state’s AAA credit rating and its ability to fund much-needed infrastructure projects.
The new government decided to sell down big, expensive assets to fund new projects, such as a road linking the port and airport to western Sydney. That may not fix the decline in revenue or placate anxious ratings agencies, but it does give the government what Baird describes as “financial flexibility” on infrastructure.
In May last year, the new desalination plant at Kurnell was sold for $2.3 billion to Hastings Funds Management and the Ontario Teachers’ Pension Plan. Ports Botany and Kembla were next and the $5 billion bid offers the country’s most populous state the chance to improve its overstretched infrastructure. “This [will] affect people’s daily lives through the infrastructure that we are spending [the proceeds] on.”
And, as Baird knew when he heard that bid number, a successful deal also helps to lay the groundwork for the potential sale of electricity transmission and distribution networks valued at $30 billion after the next election in 2015.
Meanwhile, IFM’s chief executive, Brett Himbury, and his team in Melbourne – and their advisers at investment bank UBS (in Sydney’s Chifley Place, just across the road from Baird) – were awaiting news on their bid. It would be nearly two days till they found out.
Once Baird had been given the name of the leading bidder, he assigned an army of lawyers and advisers to crawl over every aspect of the three bids before taking the result to Premier O’Farrell and his cabinet colleagues.
Shortly before midnight on Thursday, while Himbury was at home in Melbourne with his wife, the call came from the UBS offices. One of Himbury’s most senior lieutenants and IFM global head of infrastructure, Kyle Mangini, delivered the good news.
Remarkably, while Himbury had been ready to lead a bid of more than $5 billion, he had not even seen the ports in question. He wanted to keep a dispassionate distance from the assets while he mastered the detailed reports of his bid team. Now he was set to become one of NSW’s new harbour masters.
For 18 months, Himbury had taken charge of Project Cook, named for Captain James Cook, who claimed the continent for England in 1770, and in the same Botany Bay IFM was seeking to run. “We were extremely pleased when we got it,” Himbury says. “We weren’t overly confident. It was a great asset, a really great asset, and we weren’t sure someone else wasn’t going to come in with an amazing – a further amazing – bid.”
IFM is not your average fund manager. Established in 1995 and owned by 30 industry super funds – the union and employer-backed groups that account for a $267-billion-plus segment of Australia’s $1.4 trillion retirement savings sector – it was one of the first managers to get into infrastructure investments.
And it was already in the port business. In 2010, IFM led the consortium that bought the Port of Brisbane for just over $2 billion. And before the ports deal was done, it would raise another $2 billion from US pension funds and spend $2.3 billion on a 35.5 per cent stake in the Manchester Airport Group.
While Baird and the state government wanted money to fund infrastructure, Himbury and his co-investors, including Australian Super and the Abu Dhabi Investment Authority, were looking for long-life, low-risk infrastructure assets with year in-year out returns of 3-5 per cent above inflation to match their liabilities to pay for the retirement of millions of workers.
IFM was not alone in its interest. Once Baird opened the bidding, IFM and its partners faced competition from privately run local and foreign infrastructure managers, from sovereign wealth funds and from a phalanx of Canadian pension funds that have been leading the charge for long-life infrastructure assets in Australia.
Bidders were being offered a near monopoly on container shipping in NSW. Port Botany handles about 70 per cent of the more than two million containers that move through the state’s ports – from the heavy machinery and furniture coming in to the cotton, chemicals, waste paper and empty containers going out. It is the state’s only liquefied petroleum gas import facility and handles all incoming bitumen, 90 per cent of bulk chemicals and almost a third of the jet fuel.
Port Kembla is the big car import terminal for NSW and a grain and coal export facility that takes the container overflow from Port Botany. “Bringing them together was definitely more valuable, especially to investors like us, because of the diversity of trade types,” Himbury says.
The Treasurer had considered adding the state’s other major port, Newcastle, north of Sydney, to the package. However, its business is dominated by coal exports and that would have left the owner heavily exposed to the coal price. The government was told buyers didn’t want to take on that risk.
Baird announced the plan to sell the ports in October 2011, but a formal call for preliminary bids was not made until October last year, when seven consortia joined the race. The timing was ideal. Low interest rates around the world, very high levels of liquidity at banks and retirement funds, Australia’s stand-out economic record and a dearth of opportunities elsewhere were driving a wall of money towards this country.
“There was a huge array of capital sitting there,” Baird says. “My sense was that the state could do very well out of it.”
The first key cut-off date was in December, when the government reduced the bidders from seven to four: Alberta Investment Management, Canada Pension Plan Investment Board and Queensland Investment Corporation (advised by Macquarie); Ontario Teachers’ Pension Plan, Borealis Infrastructure (a unit of the Ontario Municipal Employees Retirement System) and Hastings Funds Management (Royal Bank of Canada and JPMorgan); Citi Infrastructure Partners (Credit Suisse); and IFM, Abu Dhabi Investment Authority and Global Infrastructure Partners (UBS and Lazard).
What transpired was one of the closest races for a major asset seen in Australia. Research by the deal makes it clear that there was a marked increase between the indicative bids given to the government advisers in December and the final numbers submitted in April. In the end, according to sources, the top two contenders were separated by less than $20 million.
Once he decided to make a bid, Himbury handpicked 14 IFM staffers – including two from its London office – led by an expat American and seven-year IFM veteran, Julio Garcia. At UBS, Jarrod Key assembled a team of eight, which began tracking down all the publicly available information on the ports as soon as the sale was put on the agenda.
Baird’s pre-Christmas announcement of the shortlist triggered the release of more detailed information on the ports: legal reports from the Minter Ellison team, led by Costas Condoleon; accounting documents from Pricewaterhouse Coopers; a Deloitte Access Economics paper about the NSW economy and trade flows; and engineering and environmental reports.
Advisers and bidders spent the Christmas-New Year break wading through stacks of 300 and 400-page documents and getting ready for months of round-the-clock work – site visits; meetings with port management, stevedores, environmental engineers, shipping companies; and preparing valuation reports and the legal documentation for the final bid.
The more the bidders factored in trade and economic data, the cheap and plentiful finance available and the increased number of container movements, the more they were ready to pay.
The assets were made even more attractive by the fact that the NSW government had just spent $1 billion expanding the port by a third to allow another operator, Hong Kong-based Hutchison Ports, to set up at Botany, joining established players Asciano and DP World.
Himbury confirms that the IFM consortium made a “material increase” in the offer between the indicative bid in December and the final bid on April 8. “The more we got to know about the asset, the more comfortable we got with the higher price. We are confident that if the state continues to grow at the rate it has in the past 10-20 years – because that is the big driver here, the gross state product – then the returns we get will be consistent with [our] expectations.”
Baird was no novice in this game. He spent 17 years in banking and was being groomed for bigger things when he opted for a political career. In 2007, he turned down a move to Hong Kong with HSBC to contest the state electorate of Manly.
One of Baird’s early jobs as an analyst was on an unsuccessful bid for Sydney’s airport by Deutsche Bank. (The Howard government sold the asset to Macquarie Bank in 2002 for $6.5 billion.) He says his corporate experience proved critical in the ports deal. He knew there had to be competitive tension between bidders, as well as in the financing to ensure would-be buyers didn’t lock lenders into exclusive deals that limited rivals’ access to capital. With the same banks allowed to participate in different bids, about 20 banks were involved in the end.
“One of the elements where I think we failed in privatisations in the past was [that we did] the sale at the wrong time, without competition,” Baird says. “This had all of the hallmarks [of a successful deal].”
But as much as Himbury’s team wanted the assets, they couldn’t afford to get carried away. “The risk is that they can get caught up in the emotionality of the deal and [feel] the need to buy it,” Himbury says.
IFM set up two review panels – one based in London and another drawn from the board and headed by veteran Macquarie infrastructure expert Murray Bleach – to check each other’s figures. “The deal team worked long hours for 12 months and for the last three [it was] 24/7 pretty much,” says Himbury, who’d sometimes wander into the “Club 29” tea room in IFM’s Casselden Place offices to find tables strewn with pizza boxes after a deal team all-nighter.
While IFM was getting more interested in the ports, other bidders were struggling to make a deal stack up. Citi Infrastructure Partners, which owned the old P&O Ports stevedoring business at Botany through its 2010 purchase of DP World Australia, pulled out in February to avoid any conflicts of interest due to being landlord and tenant. That left three bidders.
Global Infrastructure Partners decided the bidding was pushing the likely returns too far down for its cost of capital and relegated itself to being adviser and manager for Queensland public service retirement fund Q Super, which was a member of the IFM consortium.
As the final bid deadline of April 8 neared, IFM, UBS and adviser Andrew Leydon from Lazard made another key decision. They would make minimal changes – or mark-ups – to the terms proposed by the government, so as to deliver a clean bid that could be quickly and easily accepted by the state. That may have made a crucial difference in a tight race.
Wagner and the team advising Baird had set up a “war room” at Morgan Stanley’s Chifley Place offices. When the final bids came in at 9am on April 8, they were swamped by 50 boxes of documents. Yet they had to wait three more hours to see the numbers. First, the Treasury-appointed probity officer, Michael Shatter from RSM Bird Cameron, and lawyers from Minters spent three hours documenting exactly what had been received. By lunchtime “it was quite clear that we had a winner”, Wagner says. “But we needed to know if they had offered the same terms, or if they had made any changes that the government needed to be concerned about.”
It was 7am on Wednesday before Baird would find out. Morgan Stanley’s Wagner and Julian Peck and Treasury’s Tim Spencer and Richard Timbs had learnt enough from the intensive bid evaluation over Tuesday night and into the next morning to be able to inform the Treasurer and make a recommendation.
The IFM bid was the clear winner. Runner-up the Hastings-OTPP consortium was less than $20 million behind, but it had heavier mark-ups that could have left the state at risk for some liabilities. Months of work and an estimated $10 million bid expense came to naught for them. The Macquarie-advised QIC-CPP group had also believed it could win.
On historical earnings of about $200 million a year, the IFM deal priced the ports at 25 times annual historical earnings, much higher than another IFM-led bid had paid in the $2.1 billion privatisation of the Port of Brisbane in 2011.
Himbury says one of the reasons was that Hutchison Ports will be operating at Botany later this year, adding to potential earnings. The $1 billion expansion funded by the state has added 63 hectares of reclaimed land and five container berths to Port Botany.
With the IFM recommendation in hand, Baird kicked off the legal processes to ensure that the bid could be accepted and on Thursday evening he told O’Farrell what he proposed to do. Wagner got a call at 10.30pm clearing him to contact IFM. He called down to Key and the UBS team on the 16th floor, saying they wanted a chat, but giving nothing away.
At 11:30pm, Wagner, Shatter and Timbs took the lift down to UBS offices where Key, Lazard’s Leydon, IFM’s Garcia and GIP adviser Ari Droga were camping out with the team – “playing ping pong”, as one insider puts it – while they waited for the decision. They rang Himbury at home in Melbourne. His reaction was mixed. There was relief and joy, but he still could not quite believe it.
Then the lawyers again swung into action. The team at Freehills, which had advised the IFM bid, was told to be at the Minter Ellison offices at 1am to commence work on the final documentation for Baird and Himbury to sign at 8am on Friday.
“It wasn’t until I was standing at that press conference with Baird at state parliament that [Friday] afternoon to announce the deal [that it really sank in]. I looked over to Julio [Garcia] and winked and thought: We’ve done it.”
Yet for Himbury the work has just begun. Having paid up, he must ensure the deal works. “It’s exciting when you get a chance to buy these assets. But it comes with responsibility as you are investing five million other people’s money. Never, ever lose sight of that fact.”