Atlas Arteria (ASX: ALX) received a hostile takeover from its largest investor, IFM Global Infrastructure Fund, which currently owns about 35% of Atlas. The conditional cash offer is priced at AUD 4.75 per security, a 10% premium to the prior close. The offer increases to AUD 5.10 if IFM’s interest hits 45%.

Why it matters: The offer price is reasonable. Our fair value estimate includes a takeover premium. Excluding the takeover premium, the base offer price represents a 16% premium to our stand-alone valuation, and the higher offer represents a 24% premium.

  • The higher offer price is IFM’s best and final, meaning it won’t go higher unless a competing takeover offer emerges, which is unlikely given IFM has a blocking stake. Atlas is yet to formally respond to this hostile approach. With no date set for the offer to close, this could drag on for a while.
  • Atlas’s security price has been under pressure due to, among other things, concerns about fuel shortages stemming from the Iran war. The bid is conditional on no material adverse change in the business, so the bidder can back out if the situation worsens.

The bottom line: We maintain our AUD 4.80 per security fair value estimate for narrow-moat-rated Atlas Arteria, which is based on a stand-alone valuation of AUD 4.10 per security and a AUD 0.70 takeover premium.

  • We recommend doing nothing for now, but would likely recommend accepting the offer if the higher price is triggered and conditions are waived.

Stronger Aussie dollar and high fuel prices to weigh on Atlas Arterias earnings this year

Atlas Arteria is a global toll-road group. By far its most valuable asset is a 31% stake in Autoroutes Paris-Rhin-Rhone. Despite APRR’s dominant motorway network in eastern France, the short concession life, high base capital expenditure requirements, and subdued organic growth make it less attractive than some motorways.

Longer-term distribution growth is likely to be held back by higher interest rates and the need to pay off all debt at APRR before handing the motorway concession back to the government in 2035. After the APRR concession ends, we estimate Atlas Arteria’s distributions will fall by two-thirds to a level supported by the smaller Dulles Greenway and Chicago Skyway.

APRR is one of the largest tolled motorway groups in Europe. Concessions covering its main network end on Nov. 30, 2035, and on the smaller AREA network on Sept. 30, 2036. These concessions are relatively short compared with those for other listed toll-road operators. When the concessions end, the roads are returned to the government for no consideration and after repaying all debt. The APRR concessions set base toll increases at 70% of the consumer price index, or CPI, excluding tobacco, and set a base level of maintenance and upgrade capital expenditure of about EUR 200 million per year.

Atlas Arteria also owns 100% of Dulles Greenway and 67% of Chicago Skyway. Along with high debt levels, the main issue for Greenway is weak traffic volumes following the pandemic, and as competing roads have been upgraded. After failing debt service coverage tests in recent years, Greenway is not allowed to pay distributions to investors. The Skyway also suffers from weak traffic volume growth, but tolls increase relatively quickly, and its balance sheet is sound.

Atlas also owns the Warnow Tunnel in Germany, but it is tiny, contributing 1% of proportional EBITDA.

Bulls Say

  • Atlas offers a huge distribution yield.
  • APRR is a good-quality asset. Revenue is defensive, and earnings have a positive long-term outlook. Dulles Greenway and Chicago Skyway add longer-term value.
  • Toll roads are in high demand from pension funds and other large investors searching for yield. The two best roads could potentially be sold for high prices.

Bears Say

  • Distribution growth will be muted by the need to repay APRR debt before losing the asset in 2035.
  • While the best in Atlas Arteria’s stable, APRR is less attractive than many other toll roads because of its relatively short concession life, high ongoing capital expenditure, and subdued organic revenue growth.
  • Distributions are expected to exceed underlying free cash flows for the medium term.

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Terms used in this article

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company’s future cash flows, resulting from our analysts’ independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.