Autopista Central David Keller Belisario Galarcep Massimo Paone Javier Vilardell Agenda • Chile • Autopista Central • The Deal • Valuation Process – The Damodaran Modified World CAPM Model – EHV Cost of Capital Model • What Happened? Chile: a Brief History • Declared independence from the Spanish on September 18, 1810 • After the War of 1879 vs Bolivia and Peru, Chile entered into a period of economic expansion led by mining and manufacturing industries • 1900’s flat economic growth and high inflation • Following an acute recession Chile elected the socialist Salvador Allende of the Popular Unity Party (UP) in 1970 => Nationalization • On September 11, 1973, a military coup led by General Augusto Pinochet => crack down on political activities • All post-Pinochet presidents affiliated with a center-left party known as the Concertacion Chile: Economy GDP • Chile averaged 4.4% GDP growth (2002 and 2006) • Increased global demand and commodities prices boosted growth • Most dynamic economic sectors (2006): c communications, financial services, agriculture, and forestry Monetary Policy • Banco Central de Chile (BCC) : International degree of credibility • Inflation target of 3% (with 1% margin of error) • 6.5% nominal rate improved monetary policy which is now better Chile: Transportation Infrastructure • Increasingly good infrastructure and a large highway coverage • Since 1990, privatization of the construction and maintenance of commercially viable roads through BOT concessions: – Modern motorway network between La Serena and Puerto Montt (over 90% of Chileans covered by this network) – Also used to build urban toll roads in Santiago, Valparaíso and Concepción • Chile's Ministry of Public Works aims to increase the network of paved roads to 25,000 Km by the end of 2010 Chile: Santiago • Largest city in the country with population of 7 million • The area contains approximately 40% of Chile’s total population • Accounts for nearly 43% of domestic GDP • Is home to a number of foreign and Chilean multinational companies who often use the city as a base for other South American operations • Around 800K vehicles use the roads on any given workday in Santiago (43% of all of the total number of vehicles registered in the country) Autopista Central: Fast Facts • • • • • • Concession contract: Granted on 01/04/2001 Concession period: 30 years Construction started: 07/26/2001 Construction costs: US$ 680M Funding: – Bonds : US$ 603 m – in NY: 250 m(6.33%, 23 yrs) – in Chile: 353 m (5.69%, 23yrs) Shareholders equity: US$ 208M 48% 48% 2% 2% Main Shareholders • Strong presence in 15 countries in Latin • America • Revenues 2006: $18.3 billion • Net income 2006: $1.6 billion • Market cap (12/31/2006): $19.6 billion • Operates in South America, Africa, the U.S., and Asia • Revenues 2006: $17.0 billion • Net Income 2006: $0.7 billion • Market cap (12/31/2006): $18 billion • Listed on the Stockholm Stock Listed on the Madrid Stock Exchange Exchange (OMX) Autopista Central Autopista Central: Business Model • Toll collection: Electronic free Flow Tolling (100%) • Toll fees: • – Vary according to vehicles’ classes, traffic conditions and heavy commercial vehicles routes – Adjusted in accordance with the annual change in CPI – Autopista Central is allowed to increase toll fees at 3.5% real annually Main outsourced services – Payment collection agents – Call centre – Printing & mailing of invoices – Day Pass vending channels – Debt collection agents – Tags warehouse & logistics – Photos verification Why the Business Model Works? • Motorists have the obligation to report any changes of personal details to Government Vehicle Registration • Failure to pay toll and / or traffic fines results in: – Owners listed in Debtors Database – Vehicle listed in Traffic Offenders Database • Law (2002) makes it mandatory to have valid Tag or alternative means, when entering toll roads. Otherwise trespassers are exposed to prosecution for Law Enforcement • Toll equipment are Certified Means for collecting Enforcement data • Two ways to carry out Law Enforcement: – Traffic Regulation Enforcement by Local Police. US$ 50 fine paid to Police – Toll Payment Enforcement by Court: up to US$ 85 compensation paid to concessionaire Historical Performance: P&L • Expected strong operating growth • 70 % of 900,000 regular urban toll roads users are using Autopista Central • 39% of urban toll roads revenues are collected by Autopista Central Capital Structure – Balance Sheet High leverage all the years, on 2007: • BV Total liabilities / Equity = 4.8 • BV Debt / Equity = 3.8 (aprox. 20% Equity / 80% Debt) Deal Parties: Buyers • • • • • • Specializes in the management and operation of toll roads and airports. Listed on the Madrid Stock Exchange Revenues: $4.2 billion Net income of $0.7 billion Operates > 6,500 km of toll roads in Europe Chile: – Operates two large toll roads: highways – Operates the Santiago airport and parking lots and logistics parks Autopista Central is highly complementary to its infrastructure portfolio in LATAM. • The world’s 12th largest bank by market cap (2007) • In Chile, Santander is the largest bank in terms of total assets, loans, and shareholder’s equity • Revenues of $69.4 billion • Net income of $7.9 billion • Santander Private Equity (SPE) is the private equity unit of Santander’s Asset Management group. In 2004 SPE raised a $228 million infrastructure fund called Santander Infraestructuras I Given its knowledge of the Chilean market, Autopista Central was a perfect fit to Santander portfolio Valuation ACS' Equity Value's Sensitivity to Changes in Assumed Project Beta ACS Equity Value (USD Mln) $800,000 $684,702 $700,000 $600,000 $555,763 $665,693 $539,627 $647,111 $523,845 $500,000 $400,000 $300,000 $200,000 $100,000 $0 0.90 1.00 1.10 Project Beta EHV CAPM with SS Adjustment (Lambda = 1.00) How Did We Value the Project? Financial Projections Financial Projections Financial Projections Projected CAPEX, Net Changes in Working Capital, and Net Changes in Other Assets and Liabilities for Autopista Central Chilean Pesos in Thousands, except per share Year 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 CAPEX ($3,152,186.1) ($3,710,123.1) ($4,366,814.9) ($4,951,920.0) ($2,807,738.6) ($3,183,975.6) ($3,610,628.4) ($4,094,452.6) ($4,299,101.5) ($4,513,979.2) ($4,739,596.9) ($4,976,491.4) ($5,225,226.4) ($5,486,393.7) ($5,760,614.6) ($6,048,541.6) ($6,350,859.8) ($6,668,288.5) ($7,001,582.9) ($7,351,536.0) ($7,718,980.5) ($8,104,790.6) ($8,509,884.2) Change in Change in Other Working Assets and Capital Liabilities ($2,495,040.9) $2,782,329.9 ($2,331,551.0) $2,893,623.1 ($7,579,903.0) $3,009,368.0 ($6,753,610.2) $3,129,742.8 ($7,659,148.4) $3,254,932.5 ($8,685,474.3) $3,385,129.8 ($9,849,327.9) $3,520,535.0 ($11,169,137.8) $3,661,356.4 ($4,724,344.3) $3,807,810.6 ($4,960,476.4) $3,960,123.0 ($5,208,411.0) $4,118,528.0 ($5,468,737.8) $4,283,269.1 ($5,742,076.2) $4,454,599.8 ($6,029,076.7) $4,632,783.8 ($6,330,422.0) $4,818,095.2 ($6,646,829.1) $5,010,819.0 ($6,979,050.9) $5,211,251.8 ($7,327,877.9) $5,419,701.8 ($7,694,139.8) $5,636,489.9 ($8,078,708.3) $5,861,949.5 ($8,482,498.3) $6,096,427.5 ($8,906,470.6) $6,340,284.6 ($9,351,633.8) $6,593,896.0 Financial Assumptions • Revenues: increase, but in a decreasing manor, during the first years (until 2010) because of the new highway opening. From 2015 onward revenues have a stable growth of 5%, which is the Y/Y increase in the toll rate. • Gross margin: 80% which is the management target for the concession. • SG&A expenses: 17% of sales based on management input and historical data. • Other operating income / expense: We used historical and target data and management input. • Depreciation Schedule: The concession project is fully depreciated during the life of the project. The Chilean law allows full depreciation of the concession before the asset’s control is returned to the local government. Financial Assumptions • Dividends: No dividends paid to the equity holders until completion of the concession. Equity partners have a mezzanine credit facility that is use to extract cash flows at a better tax rate. • Shares: No shares repurchased or issued during the concession period. • Debt: For simplicity we use a linear repayment schedule. As the agreement was structured, the concession pays interest to debt holders as well as accounts payable holders. Model Inputs: Beta • • The Beta of a project is primarily affected by three factors: i. Business: in terms of business risk: medium level – – – • ii. Operating Leverage: – • The project has a highly leveraged structure which increases the risk. The book value of interest bearing liabilities divided by the Stockholders’ Equity between 2006 and 2007 has been higher than 4 (4.9 and 4.2 respectively). International Commercial Partners: – – – • The project has high fixed costs compared to variable costs and thus represents a higher operational risk. The major costs are depreciation and administrative expenses which is normal in the public infrastructure sector iii. Financial Leverage: – • Stage Risk: The toll road is in its post-completion stage, the toll road has been completely operational since 2006 Revenue Risk: The implementation and use of an electronic payment system has been done successfully thus, Revenue Risk is expected to be low Traffic Risk: Santiago represents 32% of the overall Chilean population, the GDP of the zone encompasses approximately 40% of the total Chilean GDP Kapsch Group SICE Q-Free ASA Involvement of Multilateral Agencies: none Model Inputs: Beta Company Beta Weight Atlantia SpA Abertis Infraestructuras SA Transurban Group Groupe Eurotunnel SA Brisa Auto-Estradas de Portugal SA Macquarie Group Ltd ConnectEast Group Zhejiang Expressway Co Ltd Macquarie Korea Infrastructure Fund Jiangsu Expressway Co Ltd Average Median 0.768 0.878 0.710 1.065 0.844 1.232 0.942 0.861 0.557 0.829 0.869 0.853 21.9% 20.8% 13.4% 12.0% 6.5% 6.0% 4.2% 3.9% 3.7% 3.4% 95.8% Weighted Stock Beta Market 0.168 FTSEMIB 0.182 IBEX 0.095 AS51 0.128 CAC 0.055 PSI20 0.074 AS51 0.039 AS51 0.034 HSI 0.021 KOSPI 0.028 HSI 0.824 Autopista Central Beta Calculation β = [βEstimate x (2/3)] + [ 1 x (1/3)] = [0.85 x (2/3)] + [1.00 x (1/3)] = 0.90 We’ll use a range of 0.90 to 1.00 Morgan Stanley Beta Adjustment Formula: β = [βEstimate x (2/3)] + [ 1 x (1/3)] Where: β: Beta of project βEstimate: Estimated beta of project from comparables or other method Equity Capital: Damodaran World Modified CAPM Calculation of Lambda % of Revenues Derived Locally 100% Lambda = ------------------------------------- = --------------= Ave. % of Revenues Derived 100% Locally for Similar Project 100% Weighting of Country Equity Risk Premium (Lambda = 1.00) Project Beta 0.90 Rf 4.91% Equity Risk Premium 4.58% Lambda 1.00 Country Equity Risk Premium 2.10% Modified World CAPM Cost of Equity Capital (USD) 11.13% Cost of Equity (in Chilean pesos) Project Beta 1.00 1.00 4.91% 4.58% 1.00 2.10% 11.59% 1.10 4.91% 4.58% 1.00 2.10% 12.05% 11.70% 0.90 12.18% 1.00 12.66% 1.10 Equity Capital: EHV Model Equity Capital: EHV Model Impact on Country Premium Weights Score 0.40 0.10 0.15 0.05 0.05 0.05 0.05 0.05 0.03 0.05 0.03 9.50 7.00 -2.50 2.00 0.00 -1.00 0.00 6.00 8.00 4.50 -2.00 -3.61 -0.67 0.36 -0.10 0.00 0.05 0.00 Operating -0.29 Resource risk -0.19 Technology risk Financial -0.21 Probability of Default 0.05 Political Risk Insurance 1.00 Project Cost of Capital Sovereign Currency (direct, e.g. convertibility) Currency (indirect, e.g. political risk caused by crisis) Expropriation (direct, diversion, creeping) Commercial International partners Involvement of Multilateral Agencies Sensitivity of Project to wars, strikes, terrorism Sensitivity of Project to natural disasters Sum of weights (make sure = 1.00) 15.47 Equity Capital: EHV Model • Currency risk: very low as the fluctuation range against the US dollar in the past five years has been moderate. The stability of the Chilean Peso has also been helped by a more than reputable Chilean Central Bank and its monetary policy dedicated to control inflation level • Expropriation Risk: very low based on the high level of democracy reached in Chile, a direct expropriation or a diversion seem to be improbable to happen while a creeping type of expropriation could actually be implemented by the government though the use of fiscal leverage • Sensitivity of the Project to Wars and Strikes: very sensitive to a war or to a terrorist attack but with very low probability to happen • Natural Disasters: the project is very sensitive to natural disasters • Probability of Default: moderate as in mid-2007, Autopista Central’s credit rating was raised by Standard & Poor’s (from BBB- “stable” to BBB- “positive”) and Moody’s (from Baa3 to Baa2) • US Equity Risk Premium: based on the Global CFO Outlook Survey published by Professors John Graham and Campbell Harvey of Duke University, in 2007 the Equity Risk Premium over the 10-Year US Treasury Bond was estimated to be 4.58% Capital Structure • Bonds: • 23-year, fixed-rate bonds were placed in both the local market as well as in the US • Local bonds: equivalent to USD 353 million (2003) were issued in an inflation indexed currency (Unidades de Fomento ) the exchange rate of which was published relative to the Peso (CLP) on a daily basis by the BCC. • Bonds placed in the US: USD 250 million • Common Equity: CLP 58 billion (aprox. USD 87M) • Subordinated Debt (2007): USD 125M WACC: Damodaran World Modified CAPM Damodaran Modified World CAPM WACC's Sensitivity To Changes in Project Beta WACC (in Chilean Pesos) Cost of Equity Equity/ Invested Capital Cost of Debt Debt / Invested Capital a) Cost of Equity (in Chilean pesos) Project Beta Cost of Equity (in US $) b) After Tax Cost of Debt (in Chilean Pesos) Income Tax Cost of Debt 6.74% 11.70% 20.8% 5.4% 79.2% 6.89% 12.18% 20.8% 5.5% 79.2% 7.03% 12.66% 20.8% 5.6% 79.2% 11.70% 0.90 11.132% 12.18% 1.00 11.590% 12.66% 1.10 12.048% 5.44% 17.0% 6.558% 5.50% 17.0% 6.626% 5.56% 17.0% 6.694% WACC: EHV Model EHV WACC's Sensitivity To Changes in Project Beta WACC (in Chilean Pesos) Cost of Equity Equity/ Invested Capital Cost of Debt Debt / Invested Capital a) Cost of Equity (in Chilean pesos) Beta Cost of Equity (in US $) b) After Tax Cost of Debt (in Chilean Pesos) Income Tax Cost of Debt 7.79% 15.20% 20.8% 5.9% 79.2% 7.94% 15.68% 20.8% 5.9% 79.2% 8.08% 16.16% 20.8% 6.0% 79.2% 15.20% 0.90 14.463% 15.68% 1.00 14.921% 16.16% 1.10 15.379% 5.85% 17.0% 7.053% 5.91% 17.0% 7.121% 5.97% 17.0% 7.189% Recommended Asking Price • We believe that ACS should ask for the highest value obtained in the Damodaran Modified World CAPM model or $685 million. • We believe that Abertis and Santander should pay a control premium of 10 – 20% given the macro economic conditions of the time and the strategic value that the Autopista Central asset means for each prospective buyer. • By applying the 20% control premium to the highest range of the EHV based valuation of $556 million, we obtain a value of $667 million. • This value is within range that ACS will be pressing to use under the more favorable discount rate that using the Damodaran Modified World CAPM provides them. What Happened? • In December 2007 ACS agreed to sell both its 48% stake in Autopista Central as well as its 50% ownership in another Chilean toll road to a consortium owned 57.7% by Abertis and 42.3% by Santander . • As part of the deal Abertis took over operational control of the day to day activities of Autopista Central. • In total, Abertis and Santander paid $1.08 billion for the 50% stake in Autopista Central (48% stake from ACS and 2% stake from minority shareholder) and the 50% stake that ACS controlled in the additional toll road. What Happened? • We estimate that the ACS’ 48% stake in Autopista Central was valued at just over $620 million. • This value is within range that ACS will be pressing to use under the more favorable discount rate that using the Damodaran Modified World CAPM provides them. Autopista Central Q&A Session