FAITH was a big word washing around investor circles following the $1.69 billion deal by Alinta to take over the Australian and New Zealand assets of the US-based Duke Energy Group.
The move is a giant leap for the one-time gas utility that more than doubles its size and significantly extends its geographic reach – the kind of deal that can make, or break, a company such as Alinta.
Especially when it comes just over six months after another huge deal – buying out cornerstone investor Aquila both in WA and over east in a transaction that earned it the WA Business News 2003 deal of the year.
The faith, they say, is in the good management that has grown the company from $450 million at listing in October 2000 to $1.2 billion before the Duke deal is added in.
It is not surprising, therefore, that a day after the announcement, Alinta was already trying to deflect talk that it had paid too much for the pipeline and power assets, one of the few serious market concerns about the transaction.
One Alinta source was at pains to hose down speculation that Alinta had paid $200 million more than the next bid, claiming that the next best price for the Duke assets was $1.63 billion and indicating the Perth-based group had won a tight race.
Price is a huge issue in this business.
Duke and Alinta’s former parent Aquila have exited Australia after a spending spree here late last decade that left the locals bewildered by the multiples they were willing to pay.
Epic Energy, part-owned by US-based El Paso and Dominion Resources Inc, has also come unstuck over the price it paid for the Dampier to Bunbury Natural Gas Pipeline.
It appears the US players’ vision for Australia was at least partly fuelled by the blue sky of energy trading that made the likes of now-failed Enron global giants.
However, the backdrop to Alinta’s expansionary move is different, according to those who have watched, and admired, Mr Browning’s work in turning a sleeping Perth gas utility into a national player.
If everything goes ahead as planned Alinta will leapfrog Foodland, WA Newspapers and LionOre in the process to become, at about $3 billion, WA’s third largest listed company by market capitalisation.
Alinta shareholders will be offered a stapled security in an infrastructure fund that will hold 80.1 per cent of the Duke assets while Alinta remains in direct control of 19.9 per cent and oversees the management of the assets.
He said there was little future for a regional gas distributor facing a deregulated market and the loss of its most profitable business as long-term LNG manufacturing contracts expired.
“These guys are very focused on building the business,” Mr Strachan said.
“They recognise the opportunities that flow from the divestiture of El Paso and Duke Energy which came in with both guns firing.”
Mr Strachan said there was not a huge issue with managing the business from Perth, where Mr Browning has settled with his family.
“I am a great supporter of Bob Browning and I think he is a strong leader and manager,” he said.
“Those assets will come with management in place, clearly there are people running them.”
In addition, Mr Strachan said the Alinta management had proved it would walk away from a deal if it could not make it stack up, citing its recent decision to withdraw from the race for the DBNGP.
DJ Carmichael head of research Steve Piotrowski said it was too early to say if Alinta had paid too much but the early indications were that the assets were relatively new and, in many cases, sold for less than Duke paid to build them.
Mr Piotrowski was another who backed Mr Browning’s team to make the best of this situation, even though it came on the back of another significant transaction that was yet to be fully bedded down.
“The current Alinta management has been successful in cutting costs out of the existing business,” he said.
“They have not had the time to do that with the assets they bought last year.
“I think there is some danger that they may have bitten off more than they can chew.
While the deal increases Alinta’s business exposure on the east coast and beyond, few local observers think that will cause the SECWA spin-off to shift headquarters from Perth.
The deal itself adds the Goldfields gas pipeline to its WA assets, along with two Pilbara power stations. Alinta is also going ahead with construction of a power plant at Pinjarra in partnership with Alcoa.
Therefore the new assets east of the Nullarbor – the Queensland, Eastern and Tasmanian gas pipelines, as well as power stations in Victoria and New Zealand – do not quite shift the balance of power entirely away from WA.
Alinta also remains in control of telecommunications infrastructure player Uecomm after abandoning plans to sell its stake earlier this month.
On a geographical breakdown of revenues from the new deal, WA represents more than 40 per cent of the new business, with the biggest slice being the 175MW Port Hedland power station.
The 795 kilometre Eastern Gas Pipeline between Gippsland Basin and Sydney is next biggest revenue contributor, with about one quarter of the Duke asset’s sales.
New Zealand’s 112MW Glenbrook power station located near the nation’s steel works is the other major contributor to the Duke assets, at about 12 per cent of revenues.
p The author has a beneficial interest in Alinta shares.