Atlas Arteria defies its largest shareholder with 66.7% acquisition of Chicago Skyway

Atlas Arteria (ASX: ALX), one of few remaining ASX-listed infrastructure plays, did the very thing that its biggest shareholder, IFM Investors, warned the toll road group not to do by revealing plans to buy 66.67% of Chicago Skyway from two Canadian pension funds, after entering a trading halt this morning.

Following a letter sent to Atlas’s board late August, the global investment group [IFM], made it very clear to the board again on Monday that it wanted the company to abandon its bidding process for the Chicago Skyway.

IFM, which owns around 20% of Atlas has been considering a full $7.8bn acquisition of the company for some time.

Value destructive

Chicago Skyway’s earnings are expected to be worth around US$100m a year.

However, IFM believes a successful purchase of the US toll road by Atlas would be “significantly value destructive” and dilute the dividends paid to its shareholders.

“If the company continues with this course of action, IFM Global Investment Fund (GIF) will consider all legal options available to it, including seeking an accelerated board transition by way of an extraordinary general meeting, to protect its interests as a shareholder of the company,” IFM noted in a letter.

Stick to your knitting

IFM wants Atlas to focus on funding and creating value from its existing asset portfolio.

IFM also made it clear that it “reserve all rights against directors for any diminution of value to IFM GIF’s holdings, and the holdings of other shareholders, as a result of any acquisition and concurrent capital raising.”

To the uninitiated Atlas consists of four businesses:

• A 31.14% interest in the APRR toll road group in France

• The smaller ADELAC business which connects to APRR in south-east France

• 100% of the economic interest in the Dulles Greenway, a 22km toll road in the Commonwealth of Virginia

• 100% of the Warnow Tunnel in the north-east city of Rostock, Germany

The offer

Subject to regulatory approvals and consent from the City of Chicago, Atlas will enter a partnership with Ontario Teachers’ Pension Plan, which is retaining its 33.33% interest in Chicago Skyway - a12.5km toll road - with 81 years of remaining concession.

It’s understood that the Atlas stake in Chicago Skyway, which was built in 1958 and runs high above Chicago’s harbour, has an equity value of US$2.01bn ($2.91bn).

UBS and RBC are acting as joint lead managers, bookrunners and underwriters in relation to an equity capital raising for the deal.

The details of the equity raising are being finalised and further details on the acquisition and equity raising are expected to follow today’s announcement.

What will IFM do next?

To ensure its shareholding in Atlas doesn’t diminish IFM will have little choice but to participate in any upcoming equity raising.

Whether IFM calls an extraordinary general meeting and try to spill the Atlas board, as initially threatened, remains to be seen.

What brokers think

The Atlas share price is up around 16% over one year.

Consensus on Atlas is Hold.

Based on Morningstar’s value of $7.60 the stock appears to be fairly valued.

Based on the four brokers that cover Atlas (as reported on by FN Arena) the stock is currently trading with 4.2% upside to the target price of $8.13.

Morgans expects IFM Investors to return to the negotiating table with a new bid after ceasing discussions.

Meantime, the broker retains a Hold rating and the target price rises to $7.76.

Based on the trend towards infrastructure privatisation, Macquarie also believes there is corporate appeal on offer.

Neutral and $8.10 target retained.

Atlas Arteria share price snapshot.