The quiet invasion

Speak to investors, and they’ll likely tell you the market this year will be all about secondary transactions. Plenty of companies need to sell things fast to reduce their debts, and that should lead to bargains for investors with money. Judging by Meridiam Infrastructure, it could also create some big new infra companies more or less overnight.

Meridiam is a European public-private partnership fund backed by the country’s second largest bank, Crédit Agricole, and American engineering firm AECOM Global. And it is quietly expanding its footprint in North America by buying interests being offloaded by investors who can’t afford to fund them. In late 2008 and early 2009, the three-year old fund obtained positions in four Canadian projects and one in the US. It took them over from Babcock & Brown, the Australian financier threatened with bankruptcy.

That could turn Meridiam into a big player on the continent is the space of a few months. The key was not just that it had cash available, but that it had the personal relationships to move fast, insiders say, pointing to the hiring of a former Babcock professional late last year. That allowed it to pull off the stake swaps quickly and successfully. All of the projects that Meridiam has entered are in bidding stage, so it’s perhaps a little early to talk of it as a major North American player. But they could triple Meridiam’s North American presence, and show if opportunism in such a tricky market can work.

Rare opportunity

From September 2008 onwards, as credit markets deteriorated precipitously after the fall of Lehman Brothers and the rescue of AIG, Babcock’s creditors rejected one restructuring proposal after another that would slim the firm down but allow it to stay alive.
As Babcock’s survival prospects plunged, dealmakers in it’s North American infrastructure group became convinced that their projects shouldn’t perish alongside it. So they set about transferring all the deals away from Babcock’s balance sheet – where it always housed development-stage assets – to other equity sponsors, who could either keep the bids going or bring them to financial close.
“We took the view that the projects and relationships with the partners and the significant investment in bid costs could not be  jeopardised by Babcock & Brown’s financial issues so we set about transferring all the deals,” says a person familiar with the process.

Partners wanted

Doing so would be no small feat. Even as it teetered on the brink of bankruptcy, Babcock was bidding for several complex new-build projects in the US and Canada.

Among them were three social infrastructure projects in Ontario – Bridgepoint Hospital, the Toronto South Detention Centre and the Waterloo Courthouse; three social infrastructure projects in Québec – the development of a new concert hall for the Montréal Symphony Orchestra, the Montréal University Hospital and Montréal University Research Center; two projects in British Columbia – the Fort and St. John Hospital and South Fraser Perimeter Road; and one massive project in Miami – the port of Miami Tunnel.

Babcock looked both to its consortium partners and outside to find suitable companies to take over its interests. In British Columbia, Babcock & Brown public partnership, a social infra fund that has now severed its ties with Babcock, is an equity provider for both projects. Babcock introduced an outside company, Fear Capital, as replacement equity provider for Québec’s two hospitals. And Meridiam took over much of the rest, according to a person familiar with the deal.
It took over from Babcock as equity provider for Ontario’s three projects and Montréal’s concert hall. And in the US, Babcock formally introduced Meridiam as replacement majority equity provider for the $1 billion Port of Miami Tunnel project in a letter to Florida Governor Charlie Crist on 7 November, 2008. That led to some political objections, but news broke this month that the Meridiam-led consortium had been approved for the deal.

French connection

So how did Paris-based Meridiam scoop-up five of the equity stakes Babcock was abdicating? “We regularly talk to these people and they ask us to come and join them,” says Meridiam senior partner Julia Prescot. “It was a telephone call.”
It helps, though, when the person on the other end of the line is a former member of your team. Late last year, as Babcock talent began heading for the exits, Meridiam hired Toronto-based managing director Paul Boucher. “He was somebody who we’ve been involved with and was actively involved in securing these positions,” Prescot says.

Boucher was familiar with all of Babcock’s Canadian projects and the Port of Miami Tunnel. Equally importantly, he knew what Meridiam could bring to the table in each of the transactions.  For example, in the letter to Governor Charlie Crist, he vigorously argued for Meridiam as a replacement shareholder because it “has the most uncommitted capital of any global PPP fund in the world today”.

Florida state officials were less than impressed. They refused to close on the deal, more than three years in the making, as a Meridiam-backed consortium would not have originally qualified to compete for the contract.

After joining Meridiam, Boucher continued his efforts to secure the projects, pushing instead of pulling to get the port of Miami tunnel moving again. Eventually, after four tense months of back-and-forth between state and local politicians, the objections were overcome and Meridiam now has a green light to move the project toward a 2009 financial close.

Alacrity

But while personal relationships open the door to these types of transactions, the door doesn’t stay open for long. So the key is to make a decision quickly and act on it.

In the case of Miami, just two and a half weeks after Babcock had formally introduced it as a potential partner, Meridiam confirmed to Florida that it had completed its due diligence and its board had approved the investment.

Prescot says the Meridiam due diligence process is “streamlined but strict”. The first step involves a legal assessment of the existing contracts to ensure appropriate risk transfer between the equity stakeholders, followed by a detailed financial analysis and stress testing of the project. Meridiam also carries out technical analysis to make sure that construction and operational partners can carry out their obligations and backstop them with appropriate collateral, typically securities held in escrow.
It is equally important to align interests quickly – not an easy task given the complexities involved in new development projects. Developing new infrastructure assets typically involves many more stakeholders than buying operational assets, including construction companies, operating partners (such as tolling and maintenance contractors for roads), engineers and designers. That’s in addition to state, local and federal government and regulatory bodies, who usually have a say in a public infrastructure deal.

Meridiam is well-prepared for the challenge. Its 20-person team includes project developers, engineers and other people who have worn different stakeholders’ hats, as opposed to just financiers. This allows the firm to integrate itself quickly into project processes involving industrial interests beyond financiers, Prescot says.

“Sometimes, when brought into transactions with financial partners, we find it more difficult to align ourselves with them than with industrial partners,” she adds.

Meridiam seems to have perfected this method. Earlier this year, it became a 37.5 percent equity partner in the A5 motorway PPP in Karlsruhe, Germany, after one of the original bidding partners decided not to pursue the project at the final bid stage. The $830 million project moved to contract award and then to financial close in less than two months – no small feat under current market conditions.

The young pretender

These stake swaps are transforming Meridiam into a major infrastructure player. Previously, the firm was a partner in just two US projects, where it had been selected as the preferred bidder alongside Cintra, the Spanish toll road developer. These included two toll roads in Texas, the $2 billion North Tarrant Expressway and the $2.4 billion LBJ Freeway project.
If the port of Miami tunnel, the Montreal Symphony PPP and the three social infrastructure projects in Ontario pan out, Meridiam will more than triple its presence in North America. All at a time when the global credit markets and most developed economies are in turmoil.

Which begs the question: was the credit crisis – which facilitated the demise of Babcock and spurred other big names in infrastructure to rethink their strategies – a good thing for Meridiam?

“Since the credit crisis has started, the potential opportunities being shown to us have increased a lot as other funds have found it difficult to work in this environment. Call it felicitous timing,” says Prescot, who is careful not to credit all of the fund’s success solely to external market development. “But because it has happened, we are busier than we would have been,” she adds.

There are rumours that Meridiam will soon raise a North America-specific PPP fund, but Prescot plays them down. She admits Meridiam could expand the fund to North America, but it is not clear yet how or when it would do so.

“We see a very significant opportunity in North America and, unlike others who maybe piled in two to three years ago, we’ve been doing it a bit more slowly, a bit more gently,” she says.