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The global infrastructure giant is facing more competition for assets, but it still has plenty of ways to be successful.
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Brookfield Infrastructure Partners (BIP +0.01%) recently reported another quarter of healthy growth, driven by recent acquisitions. That trend isn't expected to abate in the near term because it recently closed a significant transaction and had another deal in the pipeline. That said, on its quarterly conference call, CEO Sam Pollock noted that the market for infrastructure assets continues to heat up because investors covet the high-quality, long-term cash flows these assets produce. However, despite this growing competition, the CEO wanted investors to know that Brookfield Infrastructure Partners has five key elements to its plan, which should allow it to remain successful in finding needle-moving deals.
Pollock started off by saying:
First, being patient by keeping our powder dry and waiting for investment opportunities that meet our 12% to 15% return target. We believe that maintaining our discipline, even when market conditions are frothy, will allow us to find opportunities that meet our return thresholds.
While acquisitions are a major driver of the company's growth, it can't buy just for the sake of growing, because its returns will suffer. That's why, for example, the company hasn't yet made any acquisitions in Mexico, despite noting earlier this year that it was actively exploring deals in the country. The reason for this, according to Pollock, was that "there's probably a little bit of a disparity between views on valuations between buyers and sellers." However, he firmly believes that as buying activity slows down in Mexico, those views will narrow over time, and that "hopefully, we will find some good opportunities there in the coming quarters."
Image source: Getty Images.
Second, innovating by focusing on situations where we can differentiate ourselves from other would-be buyers. This could include creative structuring and balance sheet recapitalizations, the application of unique synergies and the ability to leverage our scalable operating groups to execute on multifaceted business plans. In many cases, we approach asset owners with outside the box ways in which they can achieve their goals by partnering with us. -- Pollock
One example of this was a transaction a few years ago with Brazilian mining giant Vale (VALE +0.00%) to buy a stake in its VLI rail-and-port business. At the time, Vale needed cash to finance the expansion of its core mining business. However, it got more than just cash because Brookfield Infrastructure Partners and its investors pledged to invest in upgrades and expansions to the system, which would benefit Vale and other customers that use the network.
Third, doing the small things well by focusing on organic growth and tuck-in acquisitions where we can utilize our scale and synergies to make accretive investments. -- Pollock
Brookfield Infrastructure Partners has a knack for starting out small and then expanding its platform through tuck-in acquisitions and organic growth projects. One of the many examples is at its Brazilian toll road platform. The company initially acquired its stake in 2012 and then expanded that stake in 2013. Further, the company and its partner have invested capital in widening the road to increase traffic capacity. Meanwhile, it acquired another incremental stake in the business last year, and this year announced that it won a concession to build a new toll road that connects to its existing network.
Fourth, being decisive by recognizing and executing on investment opportunities that meet our criteria, even in challenging market conditions. We demonstrate this ability through our recent electricity and gas transmission investments in Brazil when capital was not available in that market. -- Pollock
Here Pollock pointed to the company's recent deal to buy a stake in a natural gas transmission business from Brazilian oil giant Petrobras (PBR +0.01%) as an example of its decisiveness. Brazil's economy was in a tailspin thanks to sinking oil prices and a corruption scandal. However, Brookfield Infrastructure Partners pounced at the opportunity to purchase a high-quality asset from a distressed seller in Petrobras, which it allowed it to get an excellent deal because other investors were fleeing the Brazilian market.
Image source: Getty Images.
And lastly, it's critically important that we execute dispositions well as part of our capital sourcing plan that includes issuing equity, preferred equity and corporate debt. We've initiated the first of possibly several sales processes of mature assets that we plan to sell to buyers with a low cost of capital. We'll use these proceeds to deploy that capital into new investments at higher target returns. -- Pollock
While Brookfield Infrastructure Partners is a long-term investor, part of its strategy is to sell lower return assets when market prices for those assets are at a premium, which gives it capital to buy higher-yielding assets opportunistically. Over the past year, the company sold its European gas distribution business and Ontario Transmission business for healthy profits, giving it some of the capital it used to acquire the higher-returning gas distribution business from Petrobras.
Infrastructure investing is a hot topic globally these days, which has investors pouring money into the sector. However, just because competition is rising doesn't mean Brookfield Infrastructure Partners' growth opportunities will dry up. The company has a five-fold formula for success that it expects will continue paying big dividends for shareholders in the years to come.