Brookfield Infrastructure Partners L.P. (NYSE:BIP) recently reported somewhat disappointing second-quarter results -- at least by its standards -- as cash flow headed in reverse. However, that decline was almost entirely due to an asset sale, which gave the company cash to invest in several new opportunities that it has announced in the last few weeks. Those new additions took center stage on the company's second-quarter conference call, where management gave investors a glimpse into the reasons they're excited about these deals.
The company is carving out a nice niche for itself
Of the three deals Brookfield announced, two were corporate carve-outs, or acquisitions of business segments from a large company. In these cases, the company and its partners are buying data centers from AT&T, and Enbridge's Western Canadian gathering and processing business. These businesses weren't strategic to Enbridge or AT&T, which is why they parted with them in exchange for cash to pay down debt.
The fact that these assets were a nonstrategic part of a larger company played in Brookfield's favor because of its "expertise in executing 'carve out' transactions" like these in the past, said CEO Sam Pollock on the second-quarter call. He elaborated:
Although each of the businesses has its own distinct investment attributes, more broadly we like carve-out transactions for the following reasons. First, [they] tend to attract few financial investors and therefore valuations are generally less robust. This is normally the case because there is additional complexity in evaluating assets that need to be separated from a larger concern and often there is a requirement to bring new management into the business.
In addition, Pollock said that large corporate owners tend to underinvest in such assets and don't focus as closely on execution. Brookfield believes it can create additional value by operating these businesses more efficiently.
Brookfield has finished laying the foundation of its data platform
In addition to those benefits, the AT&T deal was strategically important to Brookfield as the company focuses on growing its data infrastructure business. Roberto Marcogliese, the deputy chief investment officer for its data infrastructure business said that "with the AT&T acquisition, we are now invested across all three of our target data infrastructure segments, ... tower infrastructure, fiber, [and] data centers."
He noted the growth prospects of this particular business: "[T]here will be opportunities to enhance the portfolio by building new facilities or making small tuck-in acquisitions to strengthen our present existing markets or enter new regions. With data expected to be the fastest-growing commodity in the world for the foreseeable future, the long-term fundamentals for data infrastructure assets remain very attractive."
Management likes the new residential infrastructure business
In addition to those two corporate carve-out transactions, Brookfield is also participating in the acquisition of Enercare (TSX:ECI). CEO Sam Pollock explained the rationale behind the deal:
[Enercare] operates in a sector that we understand very well, having reviewed the opportunity to acquire another market player in the past. It also offers many parallels to our U.K. regulated distribution business given the similarity in approach and sales channels utilized to deliver these services. Enercare is a high-quality annuity-like business with a well-established market position.
Overall, the company has an installed base of 1.2 million HVAC and other rental units serving customers. "[T]hese assets provide revenues underpinned by long-term inflation-linked contracts over many years. Recurring revenues from equipment rentals and protection plans generate approximately 80% of the company's revenue, resulting in predictable, long-term cash flows," said Pollock.
He also noted: "We see strong growth prospects for the business, given the relative under-penetration of HVAC rentals thereby presenting growth opportunities in the company's home market of Canada, and significant potential upside from the growth of the more recently acquired HVAC sales and servicing business in the U.S. In addition, there are a number of Brookfield [Asset Management (NYSE:BAM)] managed businesses that we believe can be leveraged to further enhance the growth prospects of the business."
There are a few more deals in the pipeline
Overall, Brookfield has committed to invest $1.3 billion into those three transactions. However, the company stated that it has another $400 million of acquisitions in the late stages of its deal pipeline. When pressed on the call for some more information on these deals, Sam Pollock said that these "opportunities are in the data infrastructure and energy sectors and that we are hopeful that we will have both transactions closed before the end of the month."
Moving the needle
If all $1.7 billion of the announced and late-stage transactions close, Brookfield estimates that they'll generate about $170 million of annual cash flow. That will more than replace the roughly $128 million in cash flow it lost from raising $1.6 billion in capital via the asset sale and debt issuance. Furthermore, these new additions are expected to generate stronger organic growth than the business it sold. Those stronger earnings and growth prospects are why Brookfield loves its latest additions.