Alinta outlines case for rejecting Macquarie/MBO offer

Alinta Ltd has moved to douse continuing conjecture regarding its decision to favour a bid from the Babcock & Brown/Singapore Power syndicate, going to the market with a comprehensive outline of the decision to reject the Macquarie-led offer.

With information that is largely in the market already, Alinta said the Macquarie bid was at $15.20 per share for the whole negotiating period, with a 25 cent increase coming only after the decision to go with B&B was made.

Alinta also said it was troubled by the lack of market pricing to assist in the valuation of a new company that would be created by the Macquarie/managment-buy-out team dubbed Infrastructure Company which the bidder valued at $13.95 per share. Shareholders had an option to take cash or a mix of cash and shares, but Alinta shareholders who failed to respond to the offer would have ended up with shares only.

The full announcement is below:

Following significant recent press comment, Alinta wishes to ensure that the market is fully informed regarding the various proposals made by the Macquarie Bank consortium ("Macquarie consortium") and Alinta's consideration of them.
At the time Alinta signed the Scheme Implementation Agreement with Babcock & Brown/Singapore Power, the Macquarie consortium had proposed ("final proposal") a scheme of arrangement under which Alinta shareholders would receive:
(a) an in specie distribution of Australian Pipeline Trust ("APT") units, equivalent to $1.25 per Alinta share at APT's closing price on 28 March 2007; and
(b) shares in a new company ("Infrastructure Company"), unless they elected to take either $13.95 in cash or a combination of cash and shares in Infrastructure Company.
Throughout the negotiations which spanned a period of nearly seven days, the Macquarie consortium retained this basic structure for their bid.
Subsequent to Alinta signing the Scheme Implementation Agreement with Babcock & Brown/Singapore Power and after the Macquarie consortium had been advised that its bid was unsuccessful, Alinta received an email from the Macquarie consortium also offering to allow Alinta to pay a $0.25 per share dividend prior to completion of its proposed scheme. No further details were provided.
The Directors had a number of significant concerns which led to the rejection of the Macquarie consortium's final proposal, including:
1. Infrastructure Company does not exist today and therefore does not have an observable market price. It would have been a new company established to acquire many of Alinta's infrastructure assets. However, it would not have included a number of Alinta's key growth assets (namely AlintaAGL, Wesfarmers LPG, power station developments and growth income from a number of Alinta's AIH assets) which were to be acquired by a separate company owned by Macquarie called "Energy Company". The value which would be attributed by the market to Infrastructure Company, once listed, was uncertain. It would have relied upon highly structured financial arrangements in order to provide the forecast distributions that might support a share price nominated by the Macquarie consortium. The Directors had a number of concerns relating to the valuation of Infrastructure Company, including:
(a) The Macquarie consortium was valuing an aggregate of $298 million of deferred purchase price for Energy Company payable to Infrastructure Company over the period 2007 to 2010 as though it was recurring operational cash flow of Infrastructure Company. The 2008 capital receipt of $120 million amounted to approximately 30% of that year's forecast distribution to Infrastructure Company shareholders. As presented to Alinta, these asset sale proceeds were being capitalised within Infrastructure Company at a yield of 8.5%, the same yield applied by the Macquarie consortium to the overall business, implying an aggregate value of Alinta Limited
$1.4 billion for these asset sale proceeds as part of Infrastructure Company's market capitalisation based on initial distributions. Alinta's Directors noted that this value was some $1.1 billion or $2.20 per Alinta share more than the $298 million of deferred consideration which Energy Company would be contracted to pay to Infrastructure Company over four years for those same assets;
(b) In addition to Alinta's high growth assets described above being excluded from Infrastructure Company, 85% of any future earnings growth from the higher growth assets which were to be included in Infrastructure Company, was to be paid to Energy Company through a 99 year Sales Agency Agreement. This significantly limited the potential for future growth in cash flow and distributions for Infrastructure Company; and
(c) There was no forecast growth in annual distributions per share for at least eight years.
As a result, Alinta directors had serious concerns about the potential future value of Infrastructure Company and formed the view that, post listing, there were significant risks to it maintaining the value nominated by the Macquarie consortium in their final proposal.
Alinta's Directors noted that of the total funding for the upfront consideration to Alinta shareholders, Macquarie Bank was apparently proposing to fund less than 3% itself, with the remaining 97% coming from re-gearing or repackaging of Alinta shareholder's existing assets.
Moreover, Alinta's Directors noted that under the Macquarie consortium proposal, Energy Company (owned by Macquarie) proposed to pay an aggregate of $298 million over four years for the key growth assets. Alinta values these assets in excess of $1.1 billion.
2. The availability of a cash alternative for shareholders was conditional on equity underwriting agreements totalling $4.7 billion for a period of up to 4 months, one of the largest equity market underwriting exposures in Australian financial market history. Alinta was concerned about the robustness of the underwriting commitments in the event that a large percentage of its shareholders elected to take the cash alternative, given that we understand the Macquarie consortium had represented to underwriters that the cash election was likely to be in the vicinity of 20-30% of the total equity consideration. These underwriting agreements were also subject to a wide variety of material conditions outside Alinta's control, including adverse changes in equity markets and interest rates. The cash funding of the Babcock & Brown/Singapore Power offer had no such conditions.
3. The default option under the Macquarie consortium offer (for any shareholders who did not make an election) was shares in Infrastructure Company and not cash. In the materials provided to the underwriters, the Macquarie consortium stated that it believed that over 70% of Alinta shareholders would not make an election on the scheme consideration and therefore would receive the default option.
4. The Macquarie consortium's proposal required Alinta directors to recommend the proposal as a whole and they were not permitted to recommend only the cash alternative.
For the reasons discussed above, Alinta was not prepared to recommend the shares in Infrastructure Company, and therefore the Macquarie consortium's proposal, relative to the Babcock & Brown/Singapore Power proposal which had significantly higher certainty. Consistent with this position, Alinta requested the Macquarie consortium to provide a cash default option on numerous occasions during the negotiations but the Macquarie consortium declined to do so.
The Scheme Implementation Agreement proposed by the Macquarie consortium also contained more onerous terms than that agreed with Babcock & Brown/Singapore Power, including a break fee of double the amount agreed with Babcock & Brown/Singapore Power.
The Directors remain firmly of the view that the Babcock & Brown/Singapore Power proposal is an attractive one and note that it is the only proposal in a form that shareholders can consider. The total consideration is valued at $15.00 per Alinta share based on the 30 trading day volume weighted average price ("VWAP") of the relevant Babcock and Brown and APT securities to 29 March 2007. This value represents a premium of 39% to Alinta's 30 trading day VWAP prior to announcement by Alinta of a potential management buyout on 9 January 2007.
Alinta is now progressing the schemes of arrangement in respect of the Babcock & Brown/Singapore Power consortium's proposal. In the absence of a superior proposal for the Company, and subject to an Independent Expert concluding and continuing to conclude that this proposal is in the best interests of shareholders, the Alinta directors will recommend that shareholders vote in favour of the proposal at a meeting currently scheduled during early August 2007.