Tuesday, July 25, 2017

OMERS Unloading UK Assets?

Simon Jessop of Reuters reports, Canadian pension funds sell Britain’s High Speed 1 rail link:
Two leading Canadian pension funds have agreed to sell their stakes in Britain’s High Speed 1 (HS1) rail project to a consortium of funds including HICL Infrastructure and South Korea’s National Pension Service.

The deal valued HS1 at more than 3 billion pounds (US$3.9 billion), two sources said. British investor HICL Infrastructure said it would pay about 320 million pounds for its 30 percent stake, giving an indicative equity value of 915 million pounds.

The South Korean pension fund would also take a 30 percent stake in the consortium, with Equitix Investment Management funds holding the remaining 35 percent.

Infrastructure is an increasingly attractive asset class for investors looking for stable, long-term yields and the involvement of South Korea’s public pension plan reflects growing interest by Asian buyers in prime European assets.

The deal was struck with Borealis Infrastructure, the infrastructure investment manager of the Ontario Municipal Employees Retirement System (OMERS), and Ontario Teachers’ Pension Plan, which have held their stake since 2010.

HS1 operates the 109-kilometre (68-mile) high-speed rail line connecting London St Pancras International station with the Channel Tunnel, under a 30-year concession signed in 2010.

Seven years ago Borealis and Ontario Teachers’ paid 2.1 billion pounds to operate Britain’s only high speed railway, beating rivals including Eurotunnel, Morgan Stanley and Allianz.

“We are confident that HS1 will continue to prosper under its new ownership, while Ontario Teachers’ remain committed to the U.K. as an attractive destination for future investment,” Jo Taylor, senior managing director of Ontario Teachers’, said.

Operators pay index-linked access charges to HS1, partly regulated and partly depending on the number of trains. They include Eurostar and Southeastern Trains, which operates domestic high-speed services.

In the 12 months ending March 2017, HS1 made a loss of 94 million pounds.

Update: Borealis and Ontario Teachers’ announced late last year that they were contemplating the sale of HS1 after receiving investment inquiries from third parties.
HS1 wasn't the only UK asset OMERS sold. The Canadian Press reports, Four years ago OMERS bought Civica for $635 million, today it sold it for $1.72 billion:
OMERS Private Equity has signed a deal to sell software company Civica to investment manager Partners Group for 1.055 billion pounds or roughly $1.72 billion.

The private equity arm of Ontario pension fund acquired Civica in 2013 when it was valued at 390 million pounds, or about $635,000,000.

Civica provides business software to both government organizations and the private sector in highly regulated sectors around the world.

OMERS manages investments on behalf of 470,000 members from city governments, school boards, emergency services and local agencies across Ontario.
Not bad, OMERS PE bought a software company in 2013 and sold it four years later for almost triple the cost of acquisition. This is how serious money is made in private equity.

Who did OMERS buy this company from? I suspect it was bought from one of its private equity partners. OMERS invested in the fund and when the fund matured, there was an auction to sell Civica and OMERS Private Equity bought it (I could be wrong, maybe OMERS PE independently sourced this deal but I doubt it).

Who did they sell it to? Reuters reports that Swiss asset manager Partners Group bought Civica for $1.3 billion:
Swiss asset manager Partners Group has agreed to buy Civica from OMERS Private Equity in a deal valuing the U.K.-based software firm at around 1 billion pounds ($1.30 billion), the companies said on Monday.

OMERS Private Equity, part of Canadian pension fund OMERS, acquired Civica in 2013 from 3i for 390 million pounds, according to Thomson Reuters LPC data.

Sky News reported on July 13 that Japan's NEC was interested in buying Civica for 900 million pounds. Other possible buyers included private equity firms BC Partners and Berkshire Partners, as well as Partners Group.

OMERS hired Goldman Sachs to explore a potential sale of Civica Group in November 2016.
What is Partners Group going to do with Civica? They will try to add value to sell it for a higher mutiple down the road.

OMERS has been quite active lately. Reuters reports that it is in talks to sell Teranet for $3 billion:
Canadian pension plan Ontario Municipal Employees Retirement System has been talking with major U.S. and Canadian private equity firms about selling land registry company Teranet in a deal that could fetch about $3 billion, according to people familiar with the situation.

Carlyle Group (CG.O) and KKR & Co (KKR.N) are among several buyout firms that have held discussions with Borealis Infrastructure Management, an investment division of OMERS that owns Teranet, the people said on condition of anonymity, since the talks were private.

In 2008, Borealis acquired then-publicly listed Teranet Income Fund for about $1.5 billion. Teranet Income Fund was spun off by the Ontario government in 2003.

Toronto-based Teranet, which has exclusive rights to offer electronic land registration services in Ontario and Manitoba, collects a fee every time a home in Canada's most populous province and its Western neighbor changes hands or is registered.

It also offers housing data services. Its Teranet-National Bank house price index, a collaboration with Canada's sixth biggest bank, is a closely tracked economic indicator.

OMERS, Carlyle and KKR all declined to comment.

There is no certainty that a deal will materialize, the sources said, adding that OMERS could also choose to keep the asset. It was also not immediately clear if OMERS is running a formal sales process involving investment banks.

Teranet has benefited from the boom in Canada's housing market, the people said. Canadian housing market prices soared over the past decade, with Ontario in particular seeing strong demand from foreign buyers. For example, Toronto prices rose 29.3 per cent in the year to June 30, and have more than doubled since 2009.

The move by OMERS to consider offloading Teranet suggests that the pension fund believes it may be time to sell and take the returns when the market might be close to the top.

In April, the province of Ontario said it would introduce a property tax for foreign buyers in order to cool Toronto's housing market. Concerns of a housing bubble have drawn warnings from both the Bank of Canada and the International Monetary Fund. While prices continue to rise, sales figures in Toronto have dipped in recent weeks.

Teranet's cash flow stream makes it attractive for private equity buyers, who are looking for steady returns over long-term investment horizons.
My advice to OMERS: Unload Teranet as soon as possible especially if you can get $3 billion for it.

That's all from me, if you have anything to add, feel free to email me at LKolivakis@gmail.com.

Below, an older interview with OMERS's CIO Satish Rai on Bloomberg Canada (November, 2016). I like this interview and OMERS should be doing more public interviews with him and others (don't be lazy, you're public pensions and need to communicate more effectively and more often).

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