Jan 15 - Fitch Ratings says that Cheung Kong Infrastructure Holdings Limited's (CKI, 'A-'/Stable) proposed acquisition of Barra Topco II Limited (Barra Topco) has no immediate impact on its ratings.
CKI's proposed acquisition of 100% of Barra Topco at an enterprise value of HKD3.18bn is materially smaller than previous acquisitions of UK Power Networks in October 2010 and Northumbrian Water in October 2011. The agency also believes that CKI will mostly fund the acquisition with available cash, which totalled an estimated HKD7bn at end-2012.
Fitch expects CKI's funds from operations interest coverage to have fallen marginally below the negative rating trigger of 5x for 2012, due to debt incurred since 2011, including the USD300m perpetual issue in February 2012. However, the agency expects this metric should improve in 2013 and 2014 as assets acquired from 2011 gradually increase their cash contributions to CKI. Headroom for more debt is, nevertheless, limited at the current rating level.
Barra Topco is one of the two vertically integrated waste service companies in New Zealand. It offers waste collection service for approximately 500,000 commercial and residential customers in New Zealand. Its key landfill site, Hampton Downs, accounts for about a quarter of annual landfill volumes in the Greater Auckland region, with a license to receive waste until 2030. Fitch acknowledges that barriers to entry are high given a lack of available landfill sites and high environmental standards in New Zealand.
While the proposed purchase of Barra Topco represents a deviation from CKI's preferred strategy of acquiring regulated utilities assets, Fitch does not see this as impairing CKI's risk profile. This is because Barra Topco enjoys a strong position in a developed market and is likely to provide CKI with immediate cash returns. Barra Topco's EBIT amounted to HKD209mn and HKD165mn, respectively, in 2012 and 2011.
The acquisition is pending a several conditions precedent, including a successful application of the consent under the Overseas Investment Act 2005 of New Zealand and no material adverse event having occurred prior to completion. The definition of material adverse event includes any circumstance which would reduce annual EBITDA of Barra Topco by 15% or loss of access to the Hampton Downs landfill site for more than three months. The target closing date is second quarter of 2013.