Wednesday, March 11, 2015

Caisse Chunnels Into Europe?

Barbara Shecter of the National Post reports, Quebec’s Caisse bites off a big piece of the Chunnel, snapping up a 30% stake in Eurostar International Ltd:
Canadian pensions are continuing to snap up stakes in landmark properties around the world, the Caisse de dépôt et placement du Québec becoming the latest with a 30% stake in Eurostar International Ltd., owner of the “Chunnel” rail service that runs between London and Paris.

The Quebec pension fund giant is paying about $850 million for the lion’s share of the British government’s stake in the high-speed train service best known for its route through the Channel Tunnel.

The deal is being done in partnership with Hermes Investment Management through a consortium called Patina Rail LLC, which will involve a subsidiary of Hermes buying the balance of the UK government’s 40% stake.

George Osborne, the Chancellor of the Exchequer, announced last fall that the British government intended to sell the stake to reduce the national debt. It was reported he hoped to raise at least £300 million.

Tuesday’s deal could be derailed if the state-owned railways in France and Belgium, that together own the remaining 60% of Eurostar, exercise their right to buy the British government’s stake by paying a 15% premium to the agreed price.

However, if that does not occur, the Caisse expects the deal to close during the second quarter of 2015.

“We don’t think they will exercise it and hope they would not… but it remains in their discretion,” said Macky Tall, senior vice-president of private equity and infrastructure at the Caisse.

The Eurostar transaction is also subject to regulatory approval from the European Commission and the German Federal Cartel Office.

The Quebec pension fund manager faced other competitors in the bidding process, but did not overpay, said Mr. Tall.

“We feel confident [it] will provide us with an attractive rate of return over many years,” he said.

Mr. Tall said the Caisse took Europe’s uncertain economic future into consideration when deciding how much to bid for Eurostar.

“Our position on Europe has not changed. We remain cautious,” he said.

However, he added that the rail company “has proven to be resilient” and demonstrated over the past decade that it is “able to go through the ups and downs of the European economy well.”

In addition to running between London and Paris, Eurostar’s high-speed passenger train service runs between London and Brussels.

Over the past 20 years, it has carried 150 million passengers, including 10.4 million last year.

The company made a profit of £18.6 million in 2013, according to published reports in the UK.

Mr. Tall said the Caisse approached Hermes Investment Management, a team they have known for some time and a leading institutional investor in the United Kingdom, about joining forces to bid for Eurostar.

“We did reach out to them,” he said, adding that the transaction is the Caisse’s first “joint investment” with Hermes.

Peter Hofbauer, head of Hermes Infrastructure, said in a statement that the rail company provides “attractive investment characteristics” such as long-term stable and predictable cash flow.

Eurostar was originally a partnership among three railway companies including British Rail. The French state-owned railway, SNCF, continues to own 55%, while Belgium’s SNCB owns a 5% stake.

The Caisse and SNCF have co-invested in the past. They have been partners in Keolis, a public transportation group active in 15 countries, since 2007.

Other global transportation interests for the Caisse include a 26.7% stake in the Port of Brisbane in Australia, purchased in 2013.
Nicolas Van Praet of the Globe and Mail also reports, Caisse takes stake in Eurostar railway as part of global infrastructure push:
Canadian pension fund manager Caisse de dépôt et placement du Québec is buying the British government’s stake in high-speed train service Eurostar International Ltd., part of a push to accelerate its infrastructure investments around the world.

Montreal-based Caisse, together with London-based consortium partner Hermes Investment Management, are purchasing the U.K. government’s 40-per-cent holding in the rail company in a deal expected to be announced Wednesday morning. Eurostar connects Britain with continental Europe.

The Caisse is paying about £440-million ($850-million), for a 30-per-cent share while Hermes picks up the 10-per-cent balance. The total transaction value, including assumed debt, is believed to be about £757-million.

The deal highlights a new effort by the Caisse to step up its global infrastructure investments, jumping in as owner and developer of public assets being divested by debt-challenged governments. Building on existing assets such as Australia’s Port of Brisbane, the pension fund is aiming to double its current $10-billion infrastructure portfolio by the end of 2018.

The investment also shows the Caisse‘s confidence that Eurostar can resist the economic shocks in Europe. Led by chief executive Michael Sabia, the fund remains cautious on European investments over all, but considers Eurostar a high-quality trophy asset that will generate predictable returns.

“This investment we’re making because we actually believe that it will be resilient in Europe – as it was if you look at the last decade,” said Macky Tall, the Caisse’s senior executive in charge of infrastructure. He noted Eurostar’s customer satisfaction in the service is consistently high and reliability tops 90 per cent.

Launched in 1994, Eurostar offers train service at up to 300 kilometres an hour between London and Paris, as well as London and Brussels, through the English Channel tunnel. Promising travel times of 2 hours and 15 minutes between France and Britain’s two largest cities for a return fare of £69, it carried more than 10.4 million people last year.

Eurostar’s controlling shareholder is France’s state-owned railway, the Société Nationale des Chemins de Fer Français, with a 55-per-cent stake. Belgium’s Societé Nationale des Chemins de Fer Belges holds the remaining 5 per cent.

Both railway companies have a pre-emption right to buy the U.K. government’s 40-per-cent holding in Eurostar at a 15-per-cent premium to the price the Caisse consortium is paying. Mr. Tall said the Caisse believes they won’t exercise that right because the railways have not signalled they would do so.

The deal is also conditional on winning regulatory clearance from the German Federal Cartel Office and the European Commission under the so-called EU Merger Regulation.

“I like this as an investment,” said Michel Nadeau, a former Caisse vice-president who now leads the Institute for Governance in Montreal as executive director.

“It’s much better than the other options. Staying in cash? That’ll give you nothing. Stocks will likely correct sooner rather than later. Bonds will lose value as interest rates rise. The beauty of this is that it’s a private investment with recurring revenues.”

British Chancellor of the Exchequer George Osborne announced the government’s intention to sell the Eurostar stake last October as part of a plan to raise £20-billion from various public asset sales to pay down debt. Opposition lawmakers from the Labour Party, as well as the RMT rail union have expressed apprehension about selling Eurostar, saying it could lead to more British infrastructure falling into foreign hands.

Said Mick Cash, general-secretary of the RMT union: “The French and Belgians think we are insane knocking off such a valuable and strategic infrastructure asset.”

The Caisse has an existing partnership with SNCF. Both companies are shareholders in Keolis, a public transportation provider based in France that runs a regional high-speed train line in southeast England.

Mr. Tall said the relationship helped spark the Eurostar deal. “We’re broadening and continuing to build on that quality relationship [with them],” he said.
This is a huge deal for the Caisse which is increasingly shifting its focus on domestic and international infrastructure. It signed a deal with Quebec's government to develop some of the province's future infrastructure projects and is now going after prize assets in other developed markets.

But unlike the Quebec project, which is essentially a greenfield project full of critics, the Eurostar International is a mature and coveted infrastructure asset that is already very profitable and can offer the Caisse and Hermes Investment Management steady cash flows over the next decades, if the deal passes regulatory approval and isn't nixed by the majority shareholders.

And that's where things get tricky. Canada's mighty pensions already own a huge chunk of Britain and there will be fierce opposition to this deal. This is a strategic infrastructure asset with important economic and security concerns. It's not just any old boring infrastructure asset, it's a real prize, one of the most recognizable infrastructure assets in the world.

Also, if for any reason the British and European economy stumbles and the dark forces of nationalism rear their ugly head, there could be problems down the road. Just look at what's going on in Greece with this new leftist government threatening to nationalize key infrastructure assets (left and right-wing extremism don't bode well for foreign investors) .

Still, this is a great deal for the Caisse even once you factor in all the economic uncertainty and regulatory risks. If Europe is able to finally turn the corner, which seems to be the case but with lingering risks, then this will really be a great deal for the Caisse. Even if Europe stagnates, people are still going to use high-speed trains to travel within Europe and tourism will boom as the euro plunges, adding to Eurostar's profits.

As far as pricing, I can't tell you if the Caisse overpaid but I will take Macky Tall's word that they didn't. Keep in mind, these are ultra long-term assets which pay steady cash flows, which is what the Caisse and other large Canadian pensions are increasingly looking for to match their long-dated liabilities. And by going direct, they avoid paying fees to third parties.

Below, Steve Hedley, senior associate general secretary at the RMT union talks about the Conservatives sale of the 40% UK taxpayers share of Eurostar to foreigners. Listen carefully to his comments and think about the possible backlash in the U.K. coming from the sale of Eurostar.

Also, a clip on a beginner's guide to travel from London to Paris by Eurostar train, showing check-in and boarding arrangements, first and standard class seating. Bon voyage!!


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