Brazil's economy was in a dark place two years ago. With prices of commodities like oil having tumbled and a political scandal rocking the nation, its economy had fallen into a deep recession. In that climate, most foreign investors wouldn't touch Brazilian assets with a 10-foot pole.
However, Brookfield Infrastructure Partners (NYSE:BIP) isn't like other investors, as it spies opportunities where others only see trouble. That led it to make several deals in Brazil during that turbulent period, including buying a large stake in a natural gas pipeline system from oil giant Petrobras (NYSE:PBR). That deal has turned out to be a tremendous one for the company in hindsight, especially in light of the current bidding war for a similar pipeline system in the country. It's another example of why Brookfield Infrastructure is such a great company to own for the long haul.
A tale of two deals
In September 2016, a Brookfield Infrastructure-led partnership agreed to acquire a 90% stake in Nova Transportadora do Sudeste S.A. (NTS), a nearly 1,275-mile natural gas transmission business in southeast Brazil serving the nation's core industrialized area and its most populated states, including Rio de Janeiro and Sao Paulo. Brookfield and its partners agreed to pay $5.2 billion to Petrobras, which at the time was desperate for cash to help pay down its massive debt load. In exchange, they acquired a "large-scale, high-quality utility business," according to CEO Sam Pollock, that would "contribute meaningfully to our results going forward by delivering stable, inflation-linked cash flows backed by long-term, fixed-price, off-take agreements." In other words, it would provide Brookfield and its partners with low-risk cash flows supported by long-term contracts.
The $5.2 billion transaction value is worth noting now that Petrobras is selling another pipeline system in the country. This time the company is seeking buyers for Transportadora Associada de Gas (TAG), which spans 2,800 miles across 10 states in northeast Brazil. Several interested parties have submitted bids for this business, including a consortium of French utility Engie and a Canadian pension fund. While their initial offer of $8 billion was the highest, Engie is planning to raise its bid by another $1 billion, according to a report by Reuters, to ensure it wins the auction since it can cheaply finance the transaction with debt.
Engie's bid would be $3.8 billion more than Brookfield paid and well above the $5 billion to $7 billion range analysts thought the system would fetch. While TAG is a larger pipeline system than NTS, the region it serves consumes less natural gas. Because of that, Engie will earn a much lower return on its investment than the 13% Brookfield is making on its stake in NTS.
Doing deals that create value
The NTS acquisition is just one of the many examples of Brookfield's shrewd dealmaking ability. While that deal highlights the company's ability to buy for value, the company also has a knack for picking the right times to sell. That was the case leading up to the NTS deal as the company sold electrical transmission businesses Cross-Sound Cable and Ontario Transmission for top dollar since the new owners will only generate mid-single-digit returns on their investments. Brookfield then used those proceeds to buy NTS and another utility business in South America for prices that position it to earn a return in the low teens.
The company is currently in the process of making a similar value-focused trade. Earlier this year it raised $1.3 billion by selling Transelec, an electric transmission business in Chile. That price implies that the new owners are earning a 7% return on their investment. Brookfield, meanwhile, is working on deploying those proceeds, as well as additional capital, into six transactions totaling $1.8 billion, including buying Enbridge's (NYSE:ENB) natural gas gathering and processing business in Western Canada and a stake in some of AT&T's (NYSE:T) data centers. Like Petrobras before them, both Enbridge and AT&T needed to sell assets to pay off debt so that they could get their balance sheets back on solid ground. That's how Brookfield was able to buy these assets at excellent values. Overall, the company expects its investments to generate an 11% yield on the cash it deploys. Furthermore, those new additions should deliver 5% to 7% annual cash flow growth, or roughly double the 2% to 3% yearly growth rate Transelec should produce going forward.
A company that knows how to create value
Brookfield Infrastructure Partners' skillful dealmaking continues to be on full display as it spent $3.8 billion less than what buyers are now willing to pay for a similar gas transmission business in Brazil. The company's value-focused approach has enabled it to create significant wealth for its investors over the years, evidenced by the fact it has generated a 19% total annual return during the past decade. This approach has also enabled the company to grow its distribution to investors at an 11% yearly rate over that time frame, pushing its payout to an attractive 4.7% at the moment. That high yield stands a good chance at continuing to grow at a high rate given the company's ability to create value via acquisitions, which is all the more reason that Brookfield Infrastructure is a great buy for the long haul.