Outlook for 2023: Greenfield renewables set to overtake Australasia M&A

Data Insight Inside Infra 13 January

Outlook for 2023: Greenfield renewables set to overtake Australasia M&A

Closed M&A deals in Australasia hit a record high in 2022 despite a rapid decline from mid-year on as interest rate hikes started to bite. The next few years will increasingly be dominated by greenfield renewables, but inflation is dragging on projects

Pricing uncertainly driven by runaway inflation and interest rate increases are threatening to extend a pause in M&A deals in Australia and New Zealand, with buyers slamming on the brakes since August as they hold out for a reset in valuations. 

“The fear is things could continue to reprice over the course of the next year or so," says Mark Hector, senior portfolio manager of infrastructure and real assets at Aware Super, Australia's third-biggest super fund. "You don’t want to miss out on a good opportunity, but you also don’t want to be caught out paying a certain price and then finding out the market has repriced further.” 

Live transaction value across M&A and greenfield deals is looking muted at around USD 60bn as of this week - compared with about USD 105bn a year earlier, according to data compiled by Infralogic. There are about 70 greenfield transactions likely to involve private finance worth USD 21bn getting underway or due to close in 2023. There are around 27 M&A deals so far accounting for USD 39bn, dominated by a USD 13bn bid for Origin Energy - whose due diligence will conclude on 16 January - and a potential USD 20bn Telstra InfraCo Fixed sale. Telstra has not decided if it will go ahead or what form the deal will take. 

About 162 transactions worth a record USD 112bn reached financial close in 2022 as pandemic fears eased. In 2021 – itself a big year - the numbers were 134 and USD 77.7bn, according to Infralogic data. While the number of closes in the two halves of 2022 were roughly the same at around 80 each, value dropped to USD 33bn in the July-December period from USD 80bn in the previous six months. 

Much of the activity in 2022 was in M&A - around 85 deals worth USD 67.9bn - followed by refinancings with 54 and USD 29.4bn. Greenfield transactions involving private finance were a distant third with 18 and USD 9.2bn. 

Renewables accounted for the biggest number of deals, although only seven greenfield projects got financed - a relatively small number for the sector, but still higher than all others. Transport beat it on value at more than USD 4bn, with one big metro project in Sydney and an extension of the Gold Coast Light Rail project. 

The long-term opportunity is all in greenfield. It is all in rewiring the nation, large-scale electrification and redefining transport networks. 

Greenfield renewables projects are likely to start to take over in number and value this year as a push to decarbonise gets underway. 

“The opportunity set in Australia is getting very scarce from a brownfield [M&A] perspective," says Luke Edwards, head of renewables and transition in Australia at Brookfield, who is overseeing a joint AUD 18.4bn (USD 13bn) bid with EIG for ASX-listed gentailer Origin Energy. 

"The long-term opportunity is all in greenfield," he says. "It is all in rewiring the nation, large scale electrification and redefining transport networks. If you look at the pipeline of projects, there is enough to go around for everyone.” These new projects will seed the next wave of M&A, he adds. 

The hangover from the mega deals agreed in 2021 but reaching financial close in early 2022 – most notably the acquisitions of Sydney Airport and AusNet, which alone had a combined value of USD 33bn – was a big contributor to M&A records being smashed last year. 

There were several other large transactions throughout 2022 that played their part, notably in the telco and digital sector - the other big area that will continue to fire in 2023 - including the USD 2.5bn sale of Uniti agreed in March, the USD 5.5bn sale of an 81%, 40-year concession over the Victorian motor registry finalised in August, four more mobile tower deals in Australia and New Zealand ranging from USD 600m to USD 2.5bn, and the USD 2.7bn sale of CWP Renewables agreed in December. 

More balanced year ahead 

The pullback in M&A this year has been attributed to higher cost of capital widening the gap in seller and buyer expectations, as well as a cooling of demand from some large investors, particularly LPs that are now sated after the M&A feast of the past two years met their infrastructure allocations for now. 

“There has been a lot of activity, including by us,” says Aware's Hector. “Our infrastructure and real asset portfolio is now a little bit under AUD 15bn.” That’s about 10% of the total AUD 150bn in the fund at the moment. “Whilst there is still a reasonable amount of capital around, there is not quite as much as there was, [although] there are some GPs that would be sitting on some war chests.”. 

M&A deals are usually more opaque than greenfield, so there could be other major acquisitions in the works that tip the scales towards M&A, especially if valuations drop. 

“Vendors of high-quality assets were reluctant to transact at a lower price and were waiting to see if the market had a quick correction," says Pacific Equity Partners (PEP) Managing Director Evan Hattersley. "It won’t be an immediate bounceback, but hopefully conditions will stabilise, which will be more conducive to deals in 2023." 

While the year ahead for private investors in greenfield transport projects looks quieter than it has for a decade, several people Infralogic spoke with said there could also be sales of stakes in core transport assets in roads, rail, ports and airports in Australia and New Zealand. 

Various reasons were cited, including asset valuation declines within portfolios leading to owners testing the market, or closed-end funds coming to the end of life, such as the pending sale of stakes in the Transmission Gully motorway near Wellington in New Zealand or the return of the delayed sale of the Eastlink motorway in Melbourne. 

Another could be a stake in Auckland Airport, as the city council again considers selling its 18.09% stake as it seeks to reduce its pandemic debt pile. 

Beyond 2023, renewables are likely to make up most of the privately financed greenfield transactions by number and will likely exceed M&A transactions in value in the years ahead. For example, there are a host of multibillion-dollar offshore wind farms proposed on Australia's eastern and southern seaboards, and the country's four eastern states all have massive onshore renewable energy zone programs. 

The May 2022 election of a new Labor government intent on a rapid decarbonisation of the economy has eased energy policy uncertainty. And later this year, New South Wales will be the first of several states to begin picking the winners of network operator and generation tenders for multibillion-dollar renewable energy zones, with more tenders ahead that will continue until the end of the decade. 

Mega greenfield transport projects of the past decade will also continue - including the country's biggest, the USD 20bn Sydney Metro West, with the operations and maintenance component slated for private investors with tenders likely starting next year. It is unclear how many will be privately financed. 

Looming over all of this big build is rampant inflation, globally. This is expected to continue to delay projects and stretch builders, a factor that led to the recent collapse of Australian builder Clough, which was heading several big infrastructure projects. Infrastructure Australia in December estimated that, while demand for major projects over the next five years had climbed AUD 15bn to AUD 237bn, the cost of construction materials rose by an average of 24% in the last 12 months. 

On the debt front, loans and bond issues due to be refinanced in 2023 are about USD 16bn and USD 14.5bn for 2024, compared to about USD 29bn that was refinanced in 2022 – up on 2021, but lower than in 2020 and 2018. according to Infralogic. 

One notable trend in the debt arena is the number of portfolio refinancings in renewables as several large platforms have been built and/or acquired. These include refinancings by Igneo Infrastructure Partners, Palisade Investment Partners and Bright Energy. 

Cancelled, on hold or delayed 

Last year could have been an even bigger one if not for a sizeable pile of cancelled, on hold or delayed deals as the vendor-buyer price gap blew out.  

There were more than 20 deals, including around a dozen M&A in this category in 2022, althoughsome may return depending on market conditions. These include Loscam’s Australian pallets business, its chemicals segment, IXOM, listed renewables developer Genex Energy, the waste business of BMI Group, aged care business Retire Australia, broadcast and mobile tower business BAI Communications Australia, and Vopak fuel storage terminals. 

There were also a host of gas sector deals that started but never happened, including Chevron’s North West Shelf stake sale, First Gas NZ, SEA Gas and EPIC Energy. 

A handful of others were delayed, but did manage to get done, albeit at a lower price than hoped, like NZX-listed Vector’s sale of its smart metering business and Aurizon’s sale of its East Coast Rail coal haulage arm. Some of these were also seen as low-quality assets. 

A fund manager at a large global infra investor pointed to the Loscam and IXOM deals as the beginning of the end for vendors dressing up industrial businesses as infrastructure plays to fetch the high prices typically paid for such assets. 

“Those two deals were kind of bellwethers for vendors trying to get an infrastructure cost of capital for these deals," he said. "That’s kind of the canary in the coal mine for people - that’s them trying to push it too hard.” 

For the gas businesses, many said owners were just caught out by the reluctance of infra investors to invest in any form of fossil fuel now. 

Greenfield future 

Two smaller deals Aware’s infra division completed late last year are a pointer to the future – one for an undisclosed amount in the tens of millions of dollars in North Harbour Clean Energy  - developing pumped hydro plants of 100-200 MW and a JV with CellCube making vanadium redox flow batteries (VRFB), which work well as stationary, long duration storage - and the launch of an intermodal terminal platform. 

Both are focused on greenfield construction, with North Harbour also including manufacturing. 

“Manufacturing and assembly of VRFBs is not infrastructure on its own. The only reason we are looking into the feasibility of that is it is a means to accelerate being able to provide the ultimate infrastructure solutions," Hector says. 

Edwards at Brookfield says greenfield deals will come to dominate his sector in the years ahead. But how that construction will be done will differ from the last big build in 2016 that was stimulated by the 2020 Renewable Energy Target. 

“The way everyone has looked at renewables in Australia is on the supply side,” adds Edwards. “They say let’s go get projects and then let’s go and find the offtaker before we can build. We’re reversing that. If the bid [for Origin] succeeds, we’re going to buy the offtaker and build into the offtaker. It is the circa 36 terrawatt hours that gets consumed by Origin every year.” 

Instead of masses of developers constructing a handful of projects each, in recent years some developer and infra investors found a way to partially build and then sell on large platforms that the big funds need. The investment vehicles have teams experienced enough to take on the construction risk of large development pipelines. 

“Now we are seeing the same sort of behaviour when there was certainty in the [2020 Renewable Energy Target]. Development premiums and brownfield values have increased and there is more interest in entering development,” says Danny Touma, energy transition partner at PwC. “The difference this time is people valuing the pipeline. First time round there was almost no value put on the pipeline. That’s the biggest difference between when there was policy certainty with the RET and now.” 

The difference this time is people valuing the pipeline. That’s the biggest difference between when there was policy certainty with the RET and now 

The platforms that have formed include Tilt Renewables, acquired from Infratil and Mercury in 2021 by several large Australian investors; CWP Renewables, acquired by Squadron Energy in December; Atmos, being built via various acquisitions by Igneo Infrastructure Partners; Palisade Investment Partners built over several years; and the Australian Renewables Energy Trust, created by Infrastructure Capital Group, now owned by UK-based Foresight Group, and France's ENGIE. 

Meanwhile, New Zealand headquartered Infratil in December announced it was re-entering the Australian market with a new platform called Mint Renewables. Brookfield is building another, aiming for 5 GW of under-development, construction and operating assets in five years. That target will double if it wins its bid for Origin. 

Decarbonisation deals 

Brookfield, with Australian billionaire Mike Cannon-Brookes’ Grok Ventures, bid for Australia's biggest owner of coal power, AGL Energy, early last year but was knocked back. The Canadian fund manager told Infralogic it has definitely ruled out another bid. The country’s two other major gentailers – EnergyAustralia, owned by CLP Group, and Alinta, controlled by Chow Tai Fook – have tried and so far failed to get investors to buy large stakes to help them decarbonise. 

They were hoping the federal and state governments would also step in for them and introduce a capacity mechanism to the National Electricity Market that would effectively pay them to be on standby. This would have boosted their value and likely seen sales occur, sources familiar have confirmed. However, while a capacity mechanism was agreed late last year, fossil fuel was ruled out. 

Numerous investors and advisers Infralogic spoke to said all major infra investors, rival gentailers and numerous family offices had looked at EnergyAustralia and Alinta, but both had price expectations that were too high given the size and quality of their businesses and the amount of money needed to decarbonise their coal fleet. 

Some of them said Alinta is three separate businesses – contracted assets in the Pilbara in Western Australia, gas retail and generation in WA and its east coast retail business, including the Loy Yang B coal plant – which should be sold separately to different investors. Alinta is now selling stakes in gas and a renewables generation project in Western Australia's Pilbara instead. A spokesperson for Alinta said equity sales in its business are confined to those assets. 

Government intervention  

Federal and state governments are now leading the charge to reduce the risk for private investors in a number of sectors, including housing as well as energy. 

The federal Labor government has set a target of a 43% cut in greenhouse gas emissions below 2005 levels by 2030. This means the electricity network has to be 86% renewables by then, up from about 25%-30% now. That, as well as various state renewable energy zone programs, are now driving investment. 

The federal government has drawn the ire of the gas sector in particular with plans to introduce power price arbitration to the National Electricity Market as consumer bills soar. 

Brookfield and EIG’s Origin bid was one it was speculated could be scuppered by the mooted intervention in the gas and electricity markets. Origin has a significant gas power portfolio and is a major LNG exporter. 

Edwards, however, says their bid was always based on the long-term average of power prices – which the government’s proposed changes would seek to maintain. 

“If you look at global forecasts for the Aussie market, it says there will be a big spike [in power prices], which we are in now, then you will see it come back down to normal levels,” he says. “Long-term investors always have to see through the cycle. We are a long-term investor.” 

Housing 

Another big greenfield area where a lot needs to get built is social and affordable housing. State governments have strived for years but largely failed to attract long-term infrastructure investors to help build the hundreds of thousands of new affordable homes needed. 

The new Labor Prime Minister Anthony Albanese, who grew up in social housing, has renewed hopes the recently announced national subsidies and consultations with big super funds will be enough to see a national market for such assets develop. 

So far, the government has promised an AUD 10bn Housing Australia Future Fund to directly finance 30,000 social and affordable dwellings, and earmarked AUD 350m to underwrite private investment, which will be administered by the National Housing Finance and Investment Corporation, to be renamed Housing Australia. 

It has also hosted the first of several investor roundtables to work out what further policy changes are needed to attract private investment. 

Hot data 

Data and telco deals have been the hottest sector after energy in recent years. Australia and New Zealand have witnessed a huge wave of mobile towers deals. The region’s big telcos were late to sell their vertically integrated infrastructure to independent towercos, but most people that Infralogic spoke with said that - after about seven or eight deals - those are largely completed now. 

The next stage will likely involve some fibre asset sales. But while potentially the biggest – Telstra’s InfraCo Fixed business – could be huge, so far the number of deals ahead appears fewer than for mobile. 

First off the rank will be TPG Telecom’s last mile fibre Vision Networks business. Vodafone NZ has also flagged a strategic review of its fibre. 

If Telstra sells a 49% stake in all of its InfraCo Fixed assets in one go, one estimate said it could be worth AUD 30bn. But given the scale, it could also choose to sell parts of it. 

One adviser said there are deals emerging now in regional areas where some investors are looking at consolidation of fibre and towers holdings. Some have also pointed to other emerging areas like software and satellites as potential data deals for infra funds. 

Victoria’s AUD 7.9bn motor registry privatisation was also considered a data deal. The hope is more Australian states will follow its example, especially given the big price it got. However, much will depend on whether state politics goes against privatisation again. 

That could be a distinct possibility in New South Wales at least, with the centre-right Liberal-National government that has led a wave of privatisations and PPP deals, facing an election in March. The New Zealand Labour government – which has largely eschewed private finance for infrastructure projects - is looking vulnerable for its tilt at a third term at a general election due this year. 

Buying opportunity 

With inflation and rates rising, all Infralogic spoke to were waiting for deal prices to start falling. The standoff between buyers and sellers as the cost of capital and equipment rises has been one of the reasons why numerous deals failed, so there have been few deals to set the price. 

Vector’s sale of a 50% share in its smart metering arm was a marker as it had an obvious comparison to the 50% sale of Intellihub a year earlier. The agreed price was about 14.4x EBITDA, compared to Intellihub which exceeded 20x. 

However, Vector was always expected to fetch a lower price, with significant capital expenditure needed to replace ageing meters in its New Zealand home base as well as facing stiff competition in its growth market in Australia. 

We are excited to be investing now. Whilst we haven’t seen value recalibration yet, interest rates have gone up and cashflow isn’t as abundant 

Most are expecting some reset will have to happen this year. 

“There have been recent examples of owners of some infrastructure assets with price marks that they are holding these assets for and they have all got price expectations that the market is not prepared to pay,” says Edwards. “For people that invest in hard assets – at some point in time with rates going up the return expectations need to change.” 

This could see acquisitions made as values DIP – an opportunity that hasn’t been seen for many years. 

“I think there will be opportunities as a result of some stress in the market," says a mid-sized investor. "We haven’t seen distressed assets yet. But I think it might be a slow and painful recovery this time around. There will be mid-market corporates that need capital for growth.” 

Hattersley - who oversees PEP's Secure Assets Fund aimed at mid-size, core plus infra investments - said he can see signs that deal flow was picking up again. 

“We’re starting to see higher quality deals return and advisers getting dance cards lined up for early in 2023.” He said there are also opportunities where vendors didn’t get the price they were seeking in recent auctions to follow up with them to do a bilateral deal and signs of businesses that have been “levered to perfection” getting into trouble that could provide some opportunities. 

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