[Updates here]
Unfortunately I’m not (yet) involved in either the Sell or Buy side transactions on this auction. But since I’m not privy to any confidential data, it’s perfectly legitimate for me to take some public information and play with it. So let’s do some back of the envelope calculations on what the bid price might be.
Back in September Tony Lopez, a journalist, posted an article saying:
“Properly managed, Trans Co could yield its operator between $500 million and $800 million in annual free cash or EBITDA.”
I don’t think Tony is an expert in this area, so he probably got his information from someone that is … and he was apparently talking to San Miguel in preparation of the article so …
Anyway, let’s presume the $500 to $800 million range on EBITDA.
There are two other pieces of information I’m looking at. Power Grid of India indicated just a few days ago that they would be looking for returns in the range of about 18% whereas they are used to getting returns of about 15% domestically. And here the value of the Transco concession was placed at $3.5-$4.6 billion.
I’ve run some very simplified models (this is back-of-the-envelope, remember) to see if any of this fits together. I’ve assumed:
- that the concession is for ten years
- that annual EBITDA escalates at 3% per year
- that the owner leverages his investment by financing 80% of it with debt at an average cost of 5.5% per annum
My first scenario presumed the first year’s EBITDA was at the high range of $800 million and then I postulated a series of bid prices between $3.5 and $4.7 billion to see what kind of returns the owner would achieve. Here’s the table and it shows a very high range of 46% to 85% returns (ROE or return on equity).
My second scenario was the same except I presumed the first year’s EBITDA was at the low range of $500 million. This yielded a range of 0% to 26%.
Looking at all the scenarios I ran, the ones that hold together the best seem to point to a bid price of about $3.8 billion (predicated on a $500 million annual EBITDA).
Let’s see what happens.
Don’t like my simplifying assumptions? Here is the spreadsheet on-line if you want to download it and play with it yourself.
Or here’s a pdf of the spreadsheet if you just want to print it out.