Infrastructure investors search for south Europe deals

Mon Sep 17, 2012 7:59am EDT

* Fears ECB support removes incentive to cut prices

* Spanish, Irish, Greek sales have struggled

* Risk-return trade-off puts investors off

By Raji Menon

LONDON, Sept 17 (Reuters) - Infrastructure investors hoping to snap up assets on the cheap from crisis-hit southern European countries have found themselves scrabbling around for deals as governments refuse to cut prices.

Many cash-rich funds are now preparing to spend the rest of 2012 on the sidelines after the expected fire sale on everything from state-controlled airports to electricity grids failed to materialise.

Now that the European Central Bank has pledged unlimited support to struggling states in the sovereign bond market, investors fear governments will have little incentive to adjust historic book values for quick disposals, and a long period of market inactivity beckons.

"The reason why these governments are not selling is that they think prices will be too low, and they just don't want to sell at this point in time. It's the last thing they would want to do," said Tony Rocker, a partner at infrastructure investment transaction services at consultancy firm KPMG.

"They would not get the value they would have got 3-4 years ago," he said.

Even solid, blue-chip assets in southern European states have failed to find buyers at targeted price levels.

Late last year, Spain pulled plans to sell two of its airports in Madrid and Barcelona, while Ireland and Greece, which have drawn up long shopping lists of assets for privatisation, have yet to sell any of their businesses.

Greece was hoping to dispose of about 100 assets this year - including natural gas company DEPA, gas grid operator DESFA, Hellenic Petroleum and betting firm OPAP - in the hope of raising about 3.2 billion euros ($4.02 billion).

Athens has now said it will only be able to complete the sale of its state lottery firm and a building in Athens..

Ireland, meanwhile, has been trying to sell its ports, airports, electricity and gas distribution businesses for more than 18 months.

"For some of these countries where there is uncertainty and increased country risk, this is not the best market in which to sell off state-owned assets and achieve the best price," said Marcus Ayre, head of infrastructure transactions for Europe at fund manager First State Investments.

"So sometimes, it is difficult in some of these economies to match vendors' expectations when they are looking to sell things," he added.

PRICING THE RISK

Research firm Preqin said fund managers had carried out 30 infrastructure deals this year in "safe zone" Britain, compared to 36 in 2011. But in Spain, only eight similar deals had taken place in the year-to-date against 15 in 2011. Italy had only wrapped up one deal so far in 2012, compared to 16 in 2011, it added.

The central problem, said investors, was agreeing on the right price for assets coming out of high-risk countries hit by the debt crisis.

"These big ticket assets are difficult for the broader base of institutional investors to price - especially in the case of assets that have some level of government support," said Rob Gregor, managing partner at Balfour Beatty Infrastructure Partners.

Daniel Wong, head of infrastructure and utilities for Macquarie Capital, said most investors would only deal if returns topped what governments were paying on their bonds.

"Once the government cost of borrowing breaks away and starts to head to 6-7 percent and you add the premium on top of that, most transactions cannot trade because there's too much of a pricing mismatch," he added.