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Wednesday, May 28, 2008

Turnpike Deal Gets Bumpy

Abertis-Citi Encounter High Costs and Potholes for Infrastructure Investors

America is definitely becoming a mecca for deal-hungry infrastructure funds. Whether investors in this burgeoning asset class making the pilgrimage to these shores will find redemption, however, is far from certain.

A consortium led by Spanish transportation and highway operator Abertis has offered $12.8 billion to operate the Pennsylvania Turnpike for 75 years, edging out local heavyweight Goldman Sachs Group in the process. Moreover, the final price was 20% more than Abertis, along with a Citigroup fund and a minor Spanish partner, had offered in the first round of bidding. From the looks of it, Abertis and Citi have stretched themselves to the limit.

The total size of the deal, which includes a cushion for working capital, will be $14.5 billion, of which about 60% will be funded with debt. In less shell-shocked markets, a toll road might support as much as 80% debt. But with the credit crunch, Abertis and Citi may need to tap several segments of the markets for the $8.5 billion they need.

The high price and modest leverage make the expected return on the partners' $6 billion of equity look unexciting. Abertis expects a low double-digit annual return. Some people who have analyzed the deal think returns could come in under 10%. Either way, most infrastructure investors look for 12% to 15% -- much less than, say, private-equity funds, but enough to compensate for operating risks, a long time horizon, and constraints on prices -- in this case, toll increases will be capped at the higher of inflation and 2.5%.

Abertis wanted a foothold in the U.S., where plenty of investors are eyeing infrastructure assets. If the deal is approved by Pennsylvania's legislature, the turnpike will bring the Spanish group another strategic benefit as well, extending the average life of its portfolio of toll-road concessions from 18 to 28 years. Citi's fund managers, meanwhile, get to put a big chunk of money to work and stake their claim to future deals. Goldman's bid fell about 5% short. Being trumped at the finish might seem unlucky. But with Abertis and Citi now set for rather meager returns, the investment bank may yet wind up a lucky loser.

By: Fiona Maharg-Bravo & Una Galani
Wall Street Journal; May 21, 2008

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