Apologies for the lack of postings Bristlemouth readers, things have been hectic in our little world for the past few weeks.
I have found the ideal CEO for Spark Infrastructure, though. A German who retired a few weeks ago after not lifting a finger for the past 14 years is my perfect candidate. The unnamed government official fired off an email to former colleagues on his retirement saying that, since 1998, he had been ‘present, but not really there’.
That’s exactly what we need at Spark. The newly internalised management team (whose stupid idea was it to vote for that proposal?) is most definitely ‘there’ and seem to have their hearts set on empire expansion. First was this little chestnut in the 2011 annual shareholder review:
“Spark has now put itself in a position where it is able to assess other investment opportunities with a view to diversifying its investment portfolio – by asset class, geography or income stream”.
Since that announcement, the Street Talk section of the Australian Financial Review has been full of speculation about Spark bidding for Sydney’s soon-to-be-privatised desalination plant.
One of two things can happen here. Spark lose, and we owners dust a few million dollars in bid costs. Or Spark wins the bid, and we dust a few hundred million of value on the acquisition. How can I be so sure it will destroy value?
Well, Spark doesn’t have the $600m it’s going to need to pay for the desal plant. It’s going to need to raise equity. That makes the analysis straight forward. By selling shares in what we already own to buy something new, we are simply swapping one investment for another. And I can guarantee you that what we get is not going to be worth as much as what we give away.
The Desalination Plant will sell for between 1.1 and 1.3 times its regulatory asset backing (RAB in the regulatory lingo). With big super funds lining up in alternative consortiums, it’s unlikely to go at the bottom of that range. If you strip out the unregulated business, Spark currently trades at a small discount to its RAB. It also has the obligation to invest billions of dollars over the next five years under a very favourable regulatory regime (effectively buying new assets at one times RAB). So, despite recent price appreciation, Spark still looks cheap. The Desalination Plant will be anything but.
Why would you sell something at RAB to buy something else at, say, 1.2 times RAB? You wouldn’t. Unless your underlying purpose was to grow your empire come what may. (Note to Spark shareholder relations guru, don’t bother sending me all that crap about diversification. I can look after my own diversification, thanks, and at the moment Spark forms a very nice part of a well diversified portfolio.)
Mr Unnamed German Government Employee, here’s the CEO chair. Please come to Australia, sit in it and do nothing, absolutely nothing, and we’ll all be a lot better off.