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A New Vintage of Investor

Rothschild investment banker Roger Wood explains why those new infrastructure funds are hot on utilities.

Fortnightly Magazine - March 2007

is what price you are paying. You are seeing some very heady multiples being paid both for utility types of assets and broader infrastructure types of assets (including things like ports, roads and airports) which are in turn supported by high levels of leverage. 

Fortnightly: Why would a utility consider selling its infrastructure as a standalone or spinning it off?

Wood: I think there is two reasons why they might do it. Firstly, they may deem it to be non-strategic. And the interesting area where that is happening with some companies is in transmission. You probably saw the recent announcement from Alliant about selling their Iowa transmission to ITC. Particularly in transmission, there has been a lot of discussion around the implications of operational control being taken away from the utilities. So, utilities could persuade themselves, “We have a lot of capital tied up in this investment, we cannot control it now, that control is being taken out of our hands, therefore we will deem it non-strategic and if someone pays us a good price than we’ll sell.” But I have to say that this is a tough discussion with many utility executives who have been brought up to believe that transmission is at the core of what they do, the link that binds their systems together.

The other reason is simply financial. There may be shareholder-oriented management teams and boards who would say, “I like this asset. I would like to continue to own this asset, but someone is offering me a price that I can't resist.”

Fortnightly: Are infrastructure funds generally negative or positive on utility management?

Wood: Positive. In a number of situations, for example with Macquarie and DQE, and the same with Babcock & Brown and Northwestern, the approach is to say, “We like management, they have been good at running the business, we want them to continue to run the business.” That’s also important from a regulatory perspective. They want the state regulators to feel comfortable that they are dealing with the same people in the same way. People who understand how regulation works. They can pick up the phone and call them and get an answer. Regulators also may like management being accountable to only one shareholder, so management is not distracted by worrying about how the Street is going to respond to the next quarterly earnings call.

Fortnightly: But when they invest in just the transmission asset as opposed to taking a financial stake in the utility itself, what does that say about utility management?

Wood: The view might be that they have an ability to make a bigger impact on the management of a transmission business or transmission assets than they would as a 5 percent shareholder in a publicly held company where management feels that they need to be responsible and answerable to shareholders as a whole. And they are not going to do anything which might benefit one 5 percent shareholder potentially to the detriment of the other 95 percent of shareholders. So, [infrastructure funds’] voice as a sole owner of an