Macquarie Atlas Roads (MQA) has announced its intention to internalise management. MQA's Independent Directors have committed to provide an update by no later than MQA's next AGM.
MQA performance fees crystallised
Internalisation will crystallise the payment of remaining installments of performance fees for 2016 and 2017 payable to Macquarie (subject to ongoing XJIAI outperformance) totaling approximately $61m. It will also crystallise any accrued performance fees for the 2018 test (<$5m based on current outperformance). Our modelling had already assumed accrued performance fees for 2016/17 would be paid, thus no impact on our valuation.
MQA base fees eliminated but additional fund level costs incurred
Internalisation will eliminate quarterly base fees payable to Macquarie (0.85% per annum of market capitalisation). We had assumed base fees would cost approximately $35m per annum, tailing off over time with the APRR's NPV decay. Cost savings generate 41 cents per share valuation uplift.
However, internalisation would see additional fund level costs for activities currently undertaken by Macquarie subject to the management agreements. It's not transparent what the additional costs may be, but we assume higher than what is incurred by the domestic-focused DUET Group and Spark Infrastructure (approximately $14-15m), say $17m per annum instead of approximately $4m currently. This results in a 14 cents per share valuation impact.
Value leakage from likely advisory and transitional services agreements
Previous listed fund internalisations involving Macquarie have seen material payments made for advisory and support services during the transition to internal management (we provide a summary of this in our detailed MQA Research note clients only). The cost of the MIG/MQA restructure was equivalent to approximately 2% of market cap, but this excluded the resetting of MQA's accumulated underperformance deficit to zero (was $4.8bn prior to the restructure). We assume approximately 3% of MQA's market cap or approximately $125m is paid away to Macquarie, with an equivalent capital raising required to fund the payment.
This negatively impacts our valuation by 19 cents per share.
Base and performance fees activated at the MAF (APRR) level
Macquarie currently waives the base fee and performance fee applicable to MQA under the MAF management contract. However, upon MQA internalisation these base fees (€7.4m per annum) and performance fees (15% of performance in excess of an 8% per annum equity IRR) become payable. Factoring in the additional base fees reduces our MQA valuation by 11 cents per share. There is potential that the MAF management structure with Macquarie may be collapsed (requires sale of the MEIF2 stake to a non-Macquarie fund so as to achieve an 85% MAF vote), but this could trigger loss of MAF's governance rights and provides Eiffage with the right to all of MAF at fair market value.
We expect MQA and its co-investors will negotiate these issues with Eiffage in due course.
The valuation impact of internalisation is difficult to ascertain until we know how much MQA will pay away in fees to Macquarie – the advisory and transitional services fee is the key unknown. Internalisation will remove a layer of complexity surrounding MQA and improves cashflow by approximately 1.5 cents per share.
Subsequently collapsing the MAF (APRR) structure would also make MQA even more appealing as a takeover target.
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