Former senior BHP executive and now Transurban CEO, Chris Lynch, has moved quickly to put his stamp on the toll road operator by announcing a capital raising of up to $998 million, a drastic cut to the fiscal 2009 distribution and a cost reduction program.
We will see the impact of his big switch in strategy when trading resumes in TCL securities, probably today, when the placement and other funding details are finally nailed down.
The securities finished at $5.41 on Wednesday and logic says they will fall because of the big cut in distribution.
But because the action taken by TCL and the new CEO is clear and transparent, it wouldn’t surprise to see the securities bounce and end higher in coming days.
Chris Lynch has brought a traditional set of financial skills to the job: not those of a Macquarie or Babcock and Brown bred financial engineer; he has recognised that Transurban has to pay its way in future and can’t go on borrowing to keep investors happy (who have sold out anyway).
He was a former Chief Financial Officer of BHP Billiton (which does give you a solid grounding in old fashioned finance skills, but with a modern approach) and took the Transurban job after the previous CEO, Kim Edwards retired in April.
It’s a dramatic move and one the bears a bit of examination, especially as the company issued a handy three page statement entitled: "CEO review – new investment proposition".
As Transurban pioneered the practice of borrowing to pay distributions, the change in policy and the use of key words like "excellence, financial, discipline and growth" tell the new approach.
As a result of the earlier policy, debt soared to more than $4 billion after a series of US acquisitions, plus the purchase of Sydney Roads and Hills Motorway. No more.
The onset of the credit crunch and the growing lack of trust in companies with high debt, has forced Transurban (TCL) to change: first a new CEO in April and now the results of that review.
As outlined above TCL will restructure its debt and finances. That includes the $659 million placement of 120 million securities at $5.49 each; $239 million raised through an underwritten distribution re-investment plan for the August 2008 distribution payout and up to $100 million from a share purchase plan. Cost cuts will total $20 million a year.
The placement of 10% of the listed securities will be made to the Canadian pension fund. Its stake will become 14% as it already held a 4% stake in TCL, just below the disclosure level of 5%. It would become the largest shareholder in TCL. The Ontario Teacher’s Pension Fund has around 9.4% of TCL.
Transurban confirmed that it would pay a distribution of 29c per stapled security for the half year ended June 30 but it downgraded its guidance for 2009 to 22c per security, lower than its February estimate of 58c.
Transurban said a business review undertaken since April had confirmed that a distribution of 58c was substantially in excess of operating cashflow per security. And that sums up what the whole review was about.
In his statement yesterday, Mr Lynch said in part:
"The review concluded that the business model needed to change for a number of reasons including:
- "Material change in the debt markets
- "Limited flexibility to fund growth opportunities such as Greenfields projects due to their impact on cash coverage of distributions to investors
- Limited ability to optimise the value of the Group’s investment portfolio by selling mature assets, again because of the impact on cash cover."
Mr Lynch said "Transurban assets continue to generate strongly growing underlying cash flows. In the next 12 months he said the Group will focus on cost reduction and the pursuit of existing opportunities.
“Today’s announcement means those opportunities are now funded,” Mr Lynch said. “We have put the balance sheet on a stronger footing with greater flexibility and capacity to fund our project pipeline.
”Transurban is now a cleaner, easier to understand investment proposition.”
And that’s what it is all about: clearing up the company’s debt and finances and introducing a bit of financial rigor so that the market knows that distributions will be paid from recurring cash flow, not via capital management moves, such as issuing more debt by one way or another.
Mr Lynch said Transurban’s review would continue. He will update the market on further progress at the Group’s full year results announcement on August 27.
As a result, Transurban’s move will put pressure on companies that continue to pay distributions out of debt: transport group, Asciano comes to mind, as does Babcock and Brown and its listed satellites.
