Transurban has paid $475 million for Royal Bank of Scotland’s $600 million of senior
debt in the Cross City Tunnel. There is a clause which entitles RBS to a
further $27.5M if traffic volumes markedly increase, but I think that’s
unlikely to be exercised.
In September, the CCT went into receivership for the second time. RBS selling the entirety of
the only secured debt at a 20% discount says there is no residual equity value.
Thus, Transurban has decided to buy the Cross City Tunnel for about $475M,
since their plan is clearly to convert the debt to if not 100% equity, then at
least close to it.
Can they make this pay a worthwhile return?
Current estimates for daily traffic flows in the CCT are 36,000. A report with a May 2006 figure shows 34,000, so there hasn't been much improvement over the past 7 years. 36,000 per day at a toll price of $4.95 gives gross revenue of $65M p.a. Some of the 36,000 journeys will be
into the harbour tunnel at $2.33 and some will be large vehicles at $9.89. One
might balance the other. Then again, it might not. Let’s assume current gross revenue of $60 - 65M p.a.
What would be the CCT’s operating expenses?
More than you’d think if they called in the receivers over a
$64M tax debt with a cash flow positive asset. It can’t have been all that positive. Certainly
less than $5M p.a. if they couldn’t borrow to pay a one-off tax bill. The linked AFR article above says that RBC Capital estimates EBITDA in the range $25 - 35M, implying operating costs of about $30M p.a. The
interest on the $600M is then probably around $35M p.a., although bills + 300 seems a little cheap for the risk of the debt.
Allowing for other expenses, that’s a return on equity of at
most 7% for Transurban (assuming they convert the debt).
OK, so where to from there? How could Transurban get to an
ROE of 10+%? Increase traffic flows by 40%?
Not with the rip off toll. Traffic flows haven’t increased
in 8 years. Why would they start now? It’s the toll which is the problem. Too
many people are willing to drive through the city to avoid paying $5. I do,
unless the traffic is clearly heavy. I'll even drive down William & Riley Sts to the Harbour Tunnel to avoid the $2.33 toll most times.
Do the arithmetic: Even if you spend an extra 10 minutes in
traffic to drive down William, Park & Druitt Sts and onto the Western
Distributor, that’s $5 for 10 min work = $30 per hour after tax. Most people don’t earn that in their jobs, so it makes
sense to avoid the toll, since the extra travel time is usually closer to 5 min
than 10.
For me, avoiding the toll is as much about principle as a rational economic choice. Every dollar I save is a dollar these shifty pricks won't get. Had they priced the toll at a level I consider fair, I'd use their road.
That’s what you’re up against, Transurban. People hate
feeling ripped off and many will spend time and effort avoiding it.
Here’s a thought: Why not do some proper behavioural
economic research and cash flow modelling, not the dodgy figures consultants
are paid to manufacture to meet management’s expectations?
Drivers want to use the tunnel, but not at any price. How about lowering the toll for a while, to say, $3, the
same as the Harbour Bridge and Tunnel? Make the Harbour Tunnel exit $2. Do
some serious market research, then if it’s positive, advertise the new tolls
properly and see what happens.
Traffic flows would need to increase to 60,000 per day to
achieve the same revenue, so it’s a risky experiment if it fails, because
putting the toll back up to $5 could leave the CCT with less traffic than it
had originally. Or you could be more conservative and set the toll at $3.50 and aim for 50,000 per day. The worst that could happen is a 3 month trial which fails to
significantly increase traffic numbers and costs about $5M in lost revenue.
Is that worth the gamble? Or is 7% ROE a good enough return
for risk for your shareholders?
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