The acquisition created the world’s biggest toll-road operator. But it was costly. One of the acquiring companies is now in trouble because its bridge collapsed, killing 43 people.
By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.
Recently acquired Spanish toll-road group Abertis has announced one of the biggest special dividends in Spanish history, worth almost €10 billion. That’s roughly the equivalent of half the amount dished out in dividends by all Spanish listed companies last year. And all of it will be transferred to the three rival companies that bought Abertis in a €16.5 billion joint takeover last October:
- Italy’s infrastructure giant, Atlantia, majority owned by the Benetton family
- Spanish construction behemoth, ACS, headed by Real Madrid president Florentino Perez
- ACS’s German subsidiary, Hochtief.
To complete the acquisition, which created the world’s biggest toll-road operator with some 14,000 kilometers of highways under management, the three companies raised €10 billion of fresh debt and €7 billion of equity. By combining their bids, Atlantia and ACS averted a costly bidding war while also assuaging Spanish government fears that all of Abertis’ strategic assets would fall into Italian hands.
Now, the only major loose thread left hanging is what to do with all the debt they took on to buy Abertis. That’s where this new financial operation comes in.
Instead of making the dividend payment in cash, Abertis will assume the entire debt obligations of Abertis Holdco, the holding company Atlantia, ACS and Hochtief set up to execute the takeover — all €9.975 billion of it! In other words, as the Spanish financial daily Expansión points out, Albertis effectively gets to refinance all the debt ACS, Atlantia and Hochtief borrowed last year to purchase it, almost doubling its debt load from €12.5 billion to €22.5 billion.
Last week Abertis announced plans to issue its biggest ever bond, worth at least €3 billion. According to Expansion, Abertis will have to refinance €5.7 billion of maturing debt between this year and the next, and a staggering €15.8 billion over the next five years. But how will it service all this newfound debt?
- The company says that €2.2 billion is already covered by the proceeds from its sale last year of two subsidiaries, Cellnex and Hispasat.
- As for the remaining €7.7 billion, one possible option would be to gradually pay down the principal by significantly expanding its revenues. After all, one of the main goals of last year’s merger was to create a global infrastructure powerhouse capable of competing for a project portfolio worth some $200 billion in strategic markets such as the U.S., Australia and Europe.
- Failing that, Abertis could slash its capital expenditure (capex), meaning less money spent on upgrading and maintaining its road network, which spans Spain, France, Chile and Brazil.
The third option could be hugely controversial given that Abertis’ new Italian part-owner, Atlantia, is currently facing a criminal inquiry for potential negligence in the collapse last year of the Morandi Bridge in Genoa, resulting in the deaths of 43 people and leaving 600 people homeless.
The Morandi Bridge is operated by Autostrade per l’Italia (ASPI), a wholly owned subsidiary of Atlantia, which also happens to own the inspection company responsible for safety checks on the bridge. And those checks, it seems, were not very thorough.
Around 60 suspects are currently under investigation over the bridge collapse, including Atlantia subsidiaries Autostrade and Spea Engineering, Atlantia CEO Giovanni Castellucci, Chairman Fabio Cerchiai and another 19 officials at both the infrastructure group and the transport ministry. If found guilty of negligence, Atlantia could face massive fines as well as regulatory action. The company already booked provisions for the disaster in its 2018 accounts, with a negative impact on its EBITDA of €513 million.
But the fallout could grow much bigger. A ruling against Atlantia could prompt the Italian government to revoke Atlantia’s contract to operate around 3,000 km of Italian toll roads. However, this would mean the government would have to take on many of Altantia’s liabilities, potentially swelling Italy’s already bloated public debt (last count: 131% of GDP) by a further €9.4 billion. And that is unlikely to go down well in Brussels.
It would also have significant ramifications for Atlantia’s credit profile, warns Moody’s, which currently rates the firm’s debt Baa3, just one notch above junk:
…[a]ny formal notification of non-compliance with its concession obligations and the commencement of a termination procedure would be a significant credit negative for ASPI and, in turn, Atlantia, given ASPI’s significance in the context of the wider group’s credit profile and the linkages between the two entities. Such a scenario would further increase uncertainties and expose the group to the risk of lengthy litigation procedures and sizeable fines.
In the face of such a risk, Moody’s recently downgraded Atlantia’s outlook to negative from stable. One of the few factors Moody’s cites in Atlantia’s favor is its recent acquisition of Abertis, which helped to reduce the Italian conglomerate’s dependence on its concessions business in Italy. Before the acquisition, Atlantia’s Italian toll road operations accounted for two thirds of its EBITDA; today, it accounts for just one-third.
There’s only one problem: many of the most profitable Spanish toll roads in Abertis’ portfolio are scheduled to return to public hands over the next couple of years, their initial construction costs having been paid off years ago. That includes the AP7, which stretches the entire length of Spain’s Mediterranean coast and serves as the main artery into France and Northern Europe. If Abertis loses the AP7, it will be deprived of one of its most lucrative sources of income. Without it, the company could struggle to service its now much larger debt pile.
As El País recently reported, it’s still far from clear what will happen when the road toll contracts begin to expire at the end of this year. But if anyone can convince the government to roll over the contracts for another few years, or decades, it’s Florentino Perez, the president of ACS and Real Madrid, whose ties with Spain’s central government are so intimate that just about every time one of his domestic businesses runs into trouble, it gets bailed out to the tune of billions by Spanish taxpayers. By Don Quijones.
Well-connected investors started smelling a rat 10 months before the first disclosure. Read… Balance Sheet “Error” Wreaks Havoc on UK’s Fastest Growing, Most Popular Bank
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In Spain a few years ago traveled the AP-7 between Malaga and Marbella. Remember being shocked at the toll cost and used the slower, free parallel A-7 route the rest of the week. Think 20 minute drive cost more than couple good bottles of wine!
That piece of shitness AP7 it spoil all the countryside and bring Brusselas to everywhere. A7 not big enough for so many cause there is too many now, they still thinking of tunneling to Marrocos, is just a big corridor of partition.
Yes. Drove from BCN down to Marbella last month. The tolls are numerous staggering. I figured some of them were for tunneling through hills as the tunnels appears fairly new. The bus from Nerja/La Herradura is reportedly 4 Euros. Riding the bus prolly costs way less than the tolls.
This looks like a non-private equity LBO with a twist. Now the acquirers can issue special dividends to themselves?
This reads like the plot from an old Marx brothers movie. Although I doubt even Groucho could make anything like this up, even as satire. What I don’t understand is why Don Quijones thinks there is any problem. It is a tempest in a teapot. Italy and Spain will bail everyone out, the road contracts will be renewed, and everything will be hunky-dory. Does anyone really expect anything different to happen? Ho, hum, just a typical day in the modern world.
Toll roads are very public. This works better with stuff that is not so in-your-face.
I think taxpayer bail out will pay for them divs when the circus ends.
Financial Engineering beats Mechanical Engineering every time.
So, the bridge company owns the bridge inspection company.
On what planet is this a good idea?
In what country is this even legal?
Of course, everyone’s favorite is where the government inspects itself.
You know, like banking regulations.
No! No! bridge construction & bridge inspection owned by the same company is great IF AND ONLY IF the only bridge customers are company executives.
The very definition a self-correcting problem.
Or like the European testing facilities for exhaust emissions?
According to (spainsnews.com/abertis-will-claim-the-state-almost-3000-million-euros-for-the-ap-7/) Abertis is claiming 3bn from the state for missed revenue by 2021 for the Tarragon section, although ElPais says that section is due for return later this year?
What happens will depend on the next government I expect, which is likely to be to the right, which should be Perez friendly. In fact Cataluña, PSOE and France combination are likely to become a bit shunned if the recent case on the 11M bombings leads to where is being suggested. The PP lost its mandate in 2004 due to these just before elections, it is being said that it was French inspired to drive a wedge between the right and Anglo saxon world alignment at the time, and bring socialists to power. There are many details that point to this being possible, it is all in court and under investigation, so we will see if judgement and /or revelation occur before elections if that is how it is timed. I know this is how the French work at this level, though if the above is true, not. Just one more twist to the larger picture, but possibly important, this example article raises some of the details
I’ve never understood this: why would banks lend if the money is going to pay so called “special dividends”. This just hollows out a company and the value of the collateral. Does not make sense to me. Can anyone shed light on this? Much appreciated.
Yes, I can:
1) Bank charges LARGE underwriting fee on day 1 to loan money to X-TRACT, an absolute piece of crap company.
1a) Also on day 1, X-TRACT pays credit rating agency a large credit rating fee to rate their bonds (yes, bond issuers pay rating agencies to rate bonds).
2) Bank deposits large X-TRACT underwriting fee into bank profit accounts at end of day 1.
2a) Credit rating agency deposits large X-TRACT credit rating fee into credit rating agency’s profit accounts at end of day 1.
3) Day 2-10 bank works like crazy to “securitize” X-TRACT loan (ie: sell it to a bunch of people managing other people’s money in pension funds).
4) By day 11, X-TRACT loan has been completely removed from bank’s books. It’s like they never heard of X-TRACT.
5) Around day 100, X-TRACT loan securities begins to stink so bad that somebody or other finally gives them (GASP!) a bad credit rating.
6) Around day 365, X-TRACT has been bled dry, can’t pay its debts, and settles for paying pennies on the dollar.
Trinacria, the above description is highly accurate, only the number of elapsed days for various steps may change. The above intellectual property is highly confidential, Please send your billing address so I can charge you for this consulting.
Minor clarification for extra credit:
The “LARGE underwriting fee” referenced in #1 (above), is calculated approximately as follows:
1) Abertis is issuing bonds worth at least €3 billion
2) Bank underwriting fees are in the range of 3-7% of face amount
3a) 3% of €3 billion = €90 million (US$118 million)
3b) 7% of €3 billion = €210 million (US$275 million)
NOW YOU UNDERSTAND WHY THE BANK LENDS X-TRACT €3 billion.
I chuckle at the recent pronouncements from central banks where they express their ‘grave concern’ over the how large and risky yer corporate debt market has become. For some odd reason they fail to comprehend that it is their own actions that are directly leading to the very things they warning against. It is only thanks to their silly policies that companies performing what should otherwise be patently un-economic acts such as funding dividends and buybacks through debt.
When European junk rated debt yields below US treasurys you know that’s going to cause companies to act in ways which will be negative for economic productivity.
Roads and bridges should be publicly owned and maintained. These costs, including construction costs, should be paid by fuel taxes.
I’ve got a great idea, lets let private companies own hospitals and charge sick peo……. oh, wait a minute, I forgot. Well then, lets let private companies provide pharmacuticals and build in a %….oh, I forgot. Well then, let’s let private corporations lobby politicians and hire retir…..oh, I forgot. Banking, we could…… oh.
So I assume PLAN B for hospitals is to go to the government VA model.
Took a year to get my 90+ year-old father & WWII US Marine into the system. Oh yea, and we had help from a US Congressman.
Good luck on that “big government does it better” model. Pay close attention and you’ll notice government can (easily) be as corrupt as any business (reference: billions spent of CA’s Hooterville Trolly).
The secret is accountability – until those in charge are held accountable, no model will really work.
The trouble is that politicians always promise more than is possible to deliver, and then ask for more to try to deliver it.
Paulo, if you are old enough to receive a monthly benefit from the Canada Pension Plan, do know that one of the Plan’s investments is its part ownership of Ontario’s Highway 407 toll road north of Toronto. If money is no object, it is a great road to travel on as there are so few cars using it. The tolls are sky high. The highway was built with provincial government money but then toll rights were sold off to major toll road investors to help balance the books for a former government of Ontario administration. Read the Wikipedia article on Highway 407.
Ladies and gents welcome to the teeth of the neo-liberalism order.
Mr. Spike and Mrs. Gnash they don’t be good neihbours :-( .
Not surprised to see two strategic buyers club up, probably without much competition from infra funds which have had a few bad experiences with Southern European toll roads. As mentioned further up, the strategic buyers can firmly bank on taxpayer money or indirect support from the gov’t should anything go wrong. Such as most drivers eschewing the toll roads for the free public roads, or fantastical traffic growth numbers not materialising.
If the Spanish government operates anything like my home state of California, then the toll road contracts should roll over fine.
We’ve got a company at thetollroads.com which operates roads which should’ve been paid off and made public over a decade ago. They just keep playing financial games two groups selling it to each other for company debt that now needs to be “paid off” before the roads can become public. They also got rid of their pay stations making it transponder-only several years ago, and they’ve been jacking up rates every year like clockwork.