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Author: ultimatespinach Three stars, 500 posts Feste Award Nominee! Old School Fool Global Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 207  
Subject: Re: BIP in for some more changes Date: 7/31/2012 12:26 PM
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1) It seems like these moves are more evolutionary or bolt on acquisitions than a set of transformative initiatives, like the Prime Infrastructure deal was.

2) On the other hand, these moves could be steps in a somewhat longer major transformation. For example, if they think that Latin American infrastructure plays, particularly roads will be a major chunk of their business over time, then this transaction takes on a different cast. Similar with the infrastructure assets in the UK.

Was wondering if you could give your perspective on these two issues? (Other folks' opinions are welcome too!)


Hi J. My take, for what it's worth:

1. BIP is in rapid growth mode. Annual revenues have mushroomed from $290 million in 2009 to $634 million in 2010 to $1.6 billion in 2011.

Brookfield sees infrastructure as a major growth area over the next decade for several reasons:

-- World population continues to grow, creating a demand for more infrastructure.

-- Much of the existing infrastructure around the world was built more than 50 years ago and needs to be replaced.

-- Government budgets, the traditional funding source for infrastructure spending, are shrinking, requiring sources of private capital to fill the gap.

Some of the opportunities that come along will be large, like Prime, and others will be small relative to BIP's existing portfolio as governments disgorge assets to raise cash and institutional investment funds with defined lifespans unwind. Brookfield management is more concerned with value -- a predictable 12-15 percent annual rate of return going forward -- than size (or location), in my opinion.

From BAM CEO Bruce Flatt's annual letter to shareholders:

Global infrastructure continues to evolve, with the asset class quickly becoming a readily accepted category in institutional investor allocations. As more governments and corporations look to fund their activities with private parties owning infrastructure, we believe investment opportunities will increase. As a result, this business will continue to expand over the next 10 years and we are pleased that we are positioned to be in the forefront of this movement.

2. In the latter half of the aughts, Brookfield did concentrate geographically on high-growth economies in Australia, Brazil and Canada. Going forward, Flatt has said in interviews that he believes the need of European governments (and banks) to raise cash will create opportunities to acquire infrastructure assets, although not necessarily in Europe. European holdings in South America, for example, are likely to be considered expendable before assets on the continent.

The one geographic consideration that will maintain a high level of importance is political stability. These are long-life assets, generally with contracted revenue streams that provide for increases tied to inflation and sometimes premiums over inflation. Brookfield decided quite some time ago, for example, that rather than invest directly in China, it would invest in China's growth through Australia, which feeds raw materials to China and provides a friendlier climate for foreign investment. It said explicitly that it would accept a lower rate of growth in exchange for a higher degree of safety.

In sum, I think both the size and location of BIP's acquisitions going forward are difficult to predict because neither size nor location is the primary consideration. Value, quality, political stability and contractually-guaranteed revenue streams are the chief considerations.

The one thing that is pretty much assured is that BIP will continue to grow its asset base, and it is likely to sell more shares (units) to do so. An investor in BIP must have confidence in the management team's commitment and ability to pursue only those transactions that will meet its 12-15 percent rate of return goal so that the value of the firm will continue to grow at a rate higher than the growth in the share count.

JMO, of course.
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