Institutions clamour for PFI as Allianz offers £957m for John Laing

Allianz Infrastructure has nipped in to trump Henderson’s offer for contractor John Laing with an agreed bid worth 385p per share. The cash deal values Laing at £957m (US$1.8bn), against the £887m, or 355p per share, bid from fund manager Henderson’s infrastructure arm.

“The directors of John Laing have withdrawn their recommendation of the Henderson proposals and are now recommending that John Laing shareholders accept the Allianz offers,” John Laing’s chairman William Forrester said.

Allianz Infrastructure said the offer represented a premium of about 40% to Laing’s share price before Henderson’s offer.

The bidding war for construction group John Laing has only served to underline the value being put on some of Britain’s biggest PFI and PPP schemes with some big institutional investors, including pension funds and fund managers, now clamouring to get a slice of the action.

The move by a unit of giant German insurer Allianz SE, has sparked hopes of a counter offer from UK fund manager Henderson Group.

The bid battle has also focused attention on some of Britain’s other major PFI and PPP operators as investors once again look at some of the valuations that these assets are now demanding. Balfour Beatty, Carillion, AMEC and Kier Group all have major PFI and PPP contracts in areas ranging from rail, road, schools and hospitals.

“Today’s bid from Allianz clearly has positive implications for PFI/PPP valuations, especially for Britain’s two other main players Balfour Beatty and Carillion,” said Howard Seymour of stockbrokers Bridgewell Securities.

Pension funds and major financial institutions, whose cash assets have been damaged by the volatile market conditions in bond and equity markets, are now looking hard at how they can protect their funds against sharp fluctuations in financial markets. Companies like John Laing offer more predictable and stable levels of cash flow with their PFI and PPP projects, which typically stretch out for 25-30 years. John Laing has a current portfolio of 50 PFI and PPP projects, covering highways, light rail and water utilities.

“PPP/PFI assets are very attractive for insurance companies and pension funds, as they provide long-dated, predictable cash flows with good risk-return rates,” said Ernst & Young infrastructure finance partner Pierce Ruthledge.

“There are many infrastructure funds currently looking for PPP/PFI assets in the market, far more funds than available assets so high demand is increasing these assets’ values,” he added.

Pension specialists reckon PFI equity offers a way to enhance returns meaningfully without assuming the high risks. Some of the earliest investors in these schemes were local authority pension funds.

For many, the appeal of PFI equity is likely to be as part of a toolset of alternative assets that can be used to increase yield and enhance risk diversification.

Pension companies have also become more interested in PFI and PPP assets since a secondary market for the more mature concessions developed a couple of years ago, once the major building and construction work had been completed.

John Laing was one of the first to explore this market back in 2005 when it sold stakes in four PFI projects to Allianz PFI Holdings (Jersey), a wholly owned subsidiary of Allianz which has tabled today’s bid for the company through its wholly-owned investment vehicle.

Interestingly, the first pension fund to invest in PFI contracts was Henderson, which now finds itself in the position of having to either top Allianz’s bid or walk away.

Today John Laing’s share price jumped 38-1/2 pence — or 10.8% – to 394-1/4 at 12.50 pm. This is above Allianz’s 385 pence a share offer for the ordinary equity, suggesting that a counteroffer from Henderson may be forthcoming. Henderson’s original offer was pitched at 355 pence a share.

Other parties may also be interested in entering the battle with some traders suggesting that Australia’s Macquarie Bank or Spain’s Grupo Ferrovial may be looking at the situation.

“Allianz’s move today sets a new benchmark for the control premium the secondary market is willing to pay for PFI/PPP assets,” said analysts at Oriel Securities. “This is a positive read across for all PFI/PPP stocks and particularly for AMEC and Serco Group whose portfolios are effectively up for sale,” the house said in an investment note today.

E&Y’s Ruthledge said a company such as John Laing is particularly attractive because its wide and diversified portfolio can be acquired in one go, as opposed to buying individual assets on a piecemeal basis.

“Additionally, it is of the few large UK players that combines a large ability to develop projects, in what is known as a primary market, and a good number of mature assets for the secondary market,” he said.

As part of the giant Allianz group, John Laing will also benefit from the German group’s vast financial resources — it has €1.2trn under management.

“The combination of Laing with a deep-pocketed fund makes sense,” Ruthledge continued. “It is a good combination that will notably increase the company’s equity capital,” he added.