Brookfield Infrastructure (BIP 0.03%) has been actively reshuffling its portfolio over the past year and a half. Phase two is well underway, with two asset sales announced, followed by two acquisitions. More deals appear likely given the company's asset sale target and wide-open opportunity set. In this Industry Focus: Energy clip, host Nick Sciple and contributor Matt DiLallo discuss:

  • Brookfield's funding model.
  • Its other recent deal to buy Vodafone's telecom business in New Zealand.
  • Where it might look to buy assets next.

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This video was recorded on July 11, 2019.

Nick Sciple: This deal also fits into Brookfield's continued capital recycling strategy, where they take some of their assets that they've held for a period of time, for example, their Chilean toll road business, that, when they reach close to fair value, Brookfield will realize those gains, then recycle those assets into new investments. Genesee & Wyoming is one of those. They've also been doing some further investments, another one of those was, they acquired Vodafone's telecom business in New Zealand. Can you break down how that fits into Brookfield's investments, and maybe how this capital recycling strategy is continuing to play out for the company?

Matt DiLallo: Brookfield, they're really smart about how they go about funding their business. They'll look for opportunities to cash in on things that the market or other buyers value higher than Brookfield does. They'll sell theirs for above fair value. Then they'll use that to buy things that they see as underpriced, maybe it doesn't fit in with a bigger business. That's what you see with this telecom business in New Zealand. It wasn't part of Vodafone's massive global strategy, but it's a good business for Brookfield because it fits into one of the four components that they invest in, which is the energy businesses, utility businesses, transportation, and data infrastructure as their new platform that they're building out. This is data infrastructure. This business owns cell towers, they own fiber-optic cables. But it's also a little bit different from just the infrastructure because it's got the consumer component, because they also provide cellphone services and broadband to customers over there in New Zealand. So, it's a little bit of a blend business for them, it's an integrated business.

But, their whole focus is on data. They see data as being this huge growth opportunity, because we just continue to use more and more data, especially mobile data. They're building out this platform to capture different aspects of it. Cell towers is big, these fiber optic cables, which you got your broadband on, and then data centers. So, it fits into that. They've been buying data centers all over the world, and now they've got this. They see this as a huge growth opportunity because not only do they get the growth in the acquisitions, but the organic growth. They can raise prices, they can build out new cell towers, build out new data centers. It kind of gives that dual growth driver that they're looking to juice their returns with.

Sciple: Right. You look at the way the cell towers and data centers fit. To transmit data and continue this progression that we've been on, you have to have this infrastructure to communicate and allow data to transmit. It's the same thing when you look at Genesee & Wyoming. For our continued move into e-commerce and buying things remotely, you need more and more logistics. Brookfield Infrastructure getting in the middle of that, extract a toll, and continue to drive cash flows. That's the whole idea behind this continued capital recycling strategy, is to continue increasing cash flows and distributions over time. As you see those opportunities, as they continue recycling cash flows, what opportunities do you see for Brookfield to continue increasing its distribution going forward and continue returning capital to investors as it continues this capital recycling program?

DiLallo: The reason they're selling these assets is that they see a lot of opportunities in infrastructure. There's a huge gap between what governments can fund and what they need to fund. One of the ways that they can do this -- and the same thing with private businesses -- is to sell assets. So, Brookfield will sell something that a private equity fund or pension fund would really want for a premium price, then they'll use that to fill in these gaps where it's a business that really fits in well with their infrastructure portfolio. Some of the places that they're looking at, they're looking for this where they can not only buy something that's producing cash flow says to fund the dividend, but that can grow organically. So they're looking at water. They see water infrastructure as being a big opportunity for them. They only have done I think one $115 million dollar deal for a water pipeline in Peru, but they would love to get into more water. U.S. and North American midstream, which is pipelines, processing plants, that sort of stuff. They see, I think it was a $150 billion opportunity over the next several years as MLPs consolidate and they need capital. They own some of these assets, but they see that as another growth thing. And then, in different countries -- in South America, you mentioned they sold assets in Chile. They would love to buy more assets in Chile. India's another place that they see growth.

It's a cool business to own because they're into so many different things. It's kind of like the backbone infrastructure and growth of these countries. They're cash flow-driven, so they can pay these great distributions that they'll continue to grow.

Sciple: Yeah. I think Brookfield Infrastructure provides the services that allow the things that we think that the world is heading toward. Whether it's continued e-commerce, whether it's more and more data usage, they provide the infrastructure that allows that to happen. If you're an investor and can profit a little bit from that continued progression, definitely an interesting business to be involved in.