(Update) HICL Infrastructure (HICL) and The Renewables Infrastructure Group (TRIG) have announced plans to merge to create the UK’s largest listed infrastructure company with net assets of over £5.3bn.
The move by £2.2bn HICL and £1.7bn TRIG, both managed by InfraRed Capital Partners, comes as they struggle to rerate shares stuck on wide discounts of 24% and 34% respectively.
HICL, which will buy TRIG’s assets, dropped 8% or 9.7p to 108p. TRIG rallied 10.5% or 7.5p to 77.8p before paring back its gains to 74.25p, up 3.1%.
Under the transaction, which will require shareholder approval, TRIG will wind up and its assets transferred to HICL in exchange for new HICL shares.
TRIG shareholders will have a limited cash option, allowing them to sell 15% of the company’s shares at a 10% discount to NAV. Assuming full take-up of this £250m partial cash exit, HICL shareholders should hold around 56% of the enlarged company and TRIG shareholders 44%.
Based on their 30 September valuations, TRIG shareholders will receive 0.71 HICL shares for each TRIG share.
Sun Life of Canada, the insurer that owns InfraRed, will buy a £100m, or 2.5%, stake and provide secondary market support after the merger. The deal is expected to close in the first quarter of next year.
The announcement follows “extensive engagement” between the two companies and a “positive market sounding” with their largest shareholders.
The merger will bring together HICL’s wide-ranging operations maintaining toll roads, railways, hospitals, schools alongside investments in digital infrastructure and utilities with TRIG’s wind, solar and battery storage projects in the UK and Europe.
The investment company will retain its income focus with a progressive dividend starting with an initial annual dividend target of 9p per share as part of a 10% annual total return target.
InfraRed will continue as investment manager, locked into a contract under which its current three-year notice will only taper to two years from 2029 to 2030.
There was no detail on the precise roles of TRIG’s lead fund manager Minesh Shah and his HICL counterpart Edward Hunt, InfraRed’s head of core infrastructure funds.
Renewable Energy Systems will continue to provide operational services for renewable assets within the portfolio, as it has done for TRIG since its launch in 2013.
HICL chair Mike Bane and TRIG chair Richard Morse hailed the combination as a “unique” and “transformational” opportunity to drive growth through a resilient investment proposition.
“By combining two complementary portfolios and teams, the combined company will have the profile, expertise and access to capital to seek enhanced returns from a reinvigorated investment strategy,” said Bane.
Morse said: “Together, HICL and TRIG will form the UK’s largest listed infrastructure and renewables investment company, with the scale, liquidity, and balance sheet strength to better access a broader range of global opportunities and deliver sustainable long-term value for shareholders.”
Winterflood analyst Ashley Thomas said: “This is a clearly positive deal for TRIG shareholders, with a c15% cash option at a 37% premium to its close share price and c16% share price upside from the exchange ratio at close share prices, combined with a post combination stronger balance sheet/more diverse portfolio. The attraction for HICL is less clear but does raise both NAV return target from c8% to 10% … as well as dividend yield from c7% to c7.6%.” He noted that 3i Infrastructure (3IN) had made a successful strategic shift away from core infrastructure in 2016.
However, Stifel analyst Iain Scouller questioned the desirability of mixing renewables with core infrastructure and said InfraRed risked losing both mandates if the merger proposal triggered rival bids.
“There is clearly quite a significant overlap of shareholders in both companies, particularly private wealth managers who will be exposed to both and they may find it administratively more convenient to own one larger entity, with no doubt arguments made about liquidity. On the other hand we think other shareholders either want exposure to renewables or infrastructure, but not both,” Scouller said.
Our view
James Carthew, head of investment company research at QuotedData, was also sceptical. “Take two investment companies that are already amongst the largest, most liquid and diversified in their respective sectors, knock them together to create an infrastructure conglomerate with so many moving parts that it’s much harder to analyse, retain all the same assets and seemingly prioritise more of the same over discount control, pay out a token amount of cash, declare a focus on growth while raising the dividend, and what have you created? Will shareholders nod this through or has the firing gun sounded for competing bids to emerge for these vehicles?”
