CG Asset Management has urged HICL Infrastructure (HICL) to pull out of its proposed £5.3bn merger with The Renewables Infrastructure Group (TRIG), with the Capital Gearing Trust (CGT) management group saying it was “appalled “ by the value destruction the deal will bring and that it “can see no strategic rationale” for the all-share transaction between the InfraRed stablemates.
CGAM, a HICL shareholder with 18.5m shares in the water company investor and facilities manager of toll roads, schools, hospitals and prisons, said the share price reactions of HICL and TRIG were “telling”. HICL slid 6.6% on Monday, reducing its market value to £2.1bn, while TRIG rose 5%, valued at around £1.8bn.
CGAM, a leading investor in investment companies founded by Peter Spiller, the UK’s longest-serving fund manager, said this indicated the market’s assessment, which it shared, that this was “an exceptionally poor transaction for HICL” and was overall “value destructive”.
In a letter to HICL’s chair Mike Bane, CGAM said there was no logic in the combination of two listed funds operating in “entirely different asset classes”. Their merger would not generate big cost savings and was unnecessary as investors could easily own shares in both if they wanted exposure to social infrastructure as well as renewables.
“However, many investors, like us, have made an explicit decision not to be invested in TRIG and have no desire to be forced to do so by the board of HICL,” CGAM said. TRIG shares traded at a 34% discount to net asset value before the announcement, a wider valuation gap than HICL’s 23% discount.
CGAM said this reflected investor concerns over the valuation of its wind, solar and battery storage assets, more leveraged balance sheet and the uncertainty over the UK subsidy regime for renewables after the government proposed a change in the inflation measure underpinning legacy ROC and FIT incentives.
It said the main beneficiary of the merger was InfraRed Capital Partners, manager of both funds. If the deal went ahead it would avoid TRIG having to hold a continuation vote next year on account of the wide share price discount, making the proposals a defensive move to ensure the fund manager was “not exposed to a potential loss of assets under management”.
“If the merger proposal was with another core infrastructure fund that holds similar assets and resulted in material cost savings, the strategic case would be far stronger,” said CGAM in a comment that could increase the likelihood of a rival bid emerging.
By ignoring investor concerns, HICL had effectively passed “significant value” from HICL’s shareholders to TRIG’s shareholders and InfraRed, a subsidiary of Sun Life Financial of Canada without securing anything in return.
CGAM urged Bane and the HICL board to reconsider and abandon the merger, warning that it would vote against the deal and recommend other shareholders do so too.
Our view
Matthew Read, senior analyst at QuotedData, said: “We agree with CGAM’s position on the prospect of a HICL-TRIG combination and are very pleased to see a large shareholder coming forward to challenge the proposals. We do not think such a merger is in either set of shareholders’ best interests – as yesterday’s market reaction seems to confirm – and we hope that other large shareholders follow CGAM’s lead.
“Of the two sets of shareholders, our feeling is that HICL’s appear to be more disadvantaged by the deal. TRIG has some clear challenges that do not appear to have been taken into account but regardless, forcing these two behemoths together feels less likely to create a sector champion and more likely a hard to analyse beast that will end up with an additional conglomerate discount.
“We think they should stay as two separate funds, stick to their sectors and consider rationalising their respective spaces by merging with smaller funds whose assets are aligned with their existing mandates. This would allow them to stay more relevant to institutional investors, and it would be easier to create value by stripping out costs that are duplicated.”
