CA - Triton Bought By BIP: Great Deal

2023-04-12 14:21:53 ET

Summary

• BIP and Triton agreed on a $13 billion takeover.
• This is a cash-and-stock deal, with a higher cash allocation.
• There is a nice takeover premium for TRTN investors, but the deal should still be accretive for BIP.

Article Thesis

The diversified infrastructure player Brookfield Infrastructure Partners L.P. ( BIP )( BIPC ) will acquire container leasing company Triton International Limited ( TRTN ) in a $13 billion deal. The acquisition will be good for BIP and is great for current Triton investors that have seen their investment value explode upwards.

What Happened?

Brookfield Infrastructure Partners is a diversified infrastructure player that owns and operates pipelines, energy terminals, transmission lines, data infrastructure, and so on. Triton International is a leading container leasing company that owns a huge fleet of containers that are leased to customers under long-term contracts.

BIP and Triton have agreed on a deal that will see BIP acquire Triton for $13.3 billion in cash and stock.

What You Need To Know

Two publicly-traded companies are involved -- by chance, I'm an investor in both BIP and TRTN. While I believe that the deal will be positive for both parties (and their owners), the deal naturally is more important for the shareholders of Triton, as those will not be shareholders of the company in the future, and since they will receive a hefty takeover premium.

The $13.3 billion deal (enterprise value, including TRTN's debt) will be paid for via a combination of cash and shares, with a higher cash allocation. For current Triton owners that are not interested in owning Brookfield Infrastructure Partners, the high cash portion is positive, as there will not be too much forced selling of newly-issued BIP shares.

Investors that own shares of Triton International when the deal closes will receive $68.50 in cash and $16.50 in the form of newly-issued BIP shares, which makes for an $85 takeover price and which pencils out to an 81% cash payout.

The high cash portion of the deal has advantages for both parties, but it is not a given -- that's only possible when the acquiring company has sufficient cash on hand and/or access to debt markets at favorable terms. That is the case with BIP, as the company is large, diversified, resilient versus recessions and other macro headwinds, and since a large portion of its cash flows are locked in via fee-based contracts. On top of that, BIP's parent entity Brookfield Corporation ( BN ) is one of the largest and most respected alternative asset managers, which further improves BIP's access to capital. Since BIP does not have to issue a large number of shares for this deal, as the share-based portion of the takeover price is less than 20%, this deal should be easily accretive on per-share metrics, and current BIP investors don't have to worry about dilution too much.

Triton's shareholders benefit from the high cash portion of the deal as well, since it will be easy for them to reallocate capital where they see the best value. Some will likely move some of the proceeds into BIP shares, while others that are more interested in a container leasing pureplay will opt for Triton's peer Textainer Group Holdings Limited ( TGH ), which is the other large publicly-traded container leasing player.

Financial Impact For TRTN And BIP Owners

For current Triton International investors, things are pretty clear -- the financial impact of this deal is very positive, as their shares have jumped by more than 30% in a single day. At the time of writing, TRTN trades at $83.30 per share, which is 2% below the takeover price. This indicates two things:

- First, the fact that the current price is pretty close to the takeover price suggests that the market sees a high likelihood of this deal closing. Since BIP is currently not a big container leasing player, there should be few (if any) anti-trust issues, thus I also believe that this deal will very likely close.

- Second, the fact that the current share price and the deal price are so close to each other means that there is little additional upside for TRTN shareholders when they keep holding their shares until the deal closes. Of course, it is possible that the deal gets renegotiated or that another company makes a higher bid, but I personally wouldn't want to speculate on that.

Triton's shareholders thus benefit from a hefty one-time gain of more than 30%, and as a result of that, TRTN stock has soared to a new all-time high. While I do not believe that BIP is overpaying, the takeover price seems very fair for TRTN shareholders -- this is not a deal where the acquirer has taken advantage of a temporarily depressed share price. Instead, the acquirer pays a fair amount of money for a quality company, which is why TRTN holders can exit their position at the highest price the company has ever traded at.

Triton is forecasted to earn $9.50 this year, which pencils out to a 9x earnings multiple. For a company with secure strong profits, but little profit growth, that seems like a relatively fair deal to me. Of course, one could argue that $90 would have been justified as well, but I'm happy to take a 30%+ gain on one of my holdings.

For Brookfield, the deal makes sense as well. The ~9x earnings multiple, including the takeover premium, is lower than BIP's current valuation. Based on expected funds from operations for the current year, Brookfield Infrastructure is trading at an 11x multiple. When the acquired company is cheaper than the acquirer, deals are generally accretive, even before synergies. It is likely that some synergies can be captured here, e.g. since TRTN won't have to do its own quarterly and annual reports any longer. Synergies can likely also be captured when it comes to the cost of capital, as the larger and more diversified BIP could be able to access debt markets at more favorable terms relative to TRTN as a standalone company.

Triton will earn around $530 million this year, according to Wall Street estimates. The interest expenses on Triton's debt are already accounted for here. When Brookfield acquires Triton, it will have to pay $3.8 billion in cash and will issue 27 million shares, based on a TRTN share count of 56 million. Let's assume that BIP will not use cash on the balance sheet and that it will have to pay 6% interest on the $3.8 billion in additional debt, which would result in $230 million of additional interest expenses, meaning that the deal would add $300 million to BIP's profits on a net basis. In reality, the deal could add more, as BIP can use some cash on its balance sheet and since the 6% interest rate assumption seems conservative. But even the $300 million estimate would be positive for BIP's shareholders -- the company's share count would climb by 6%, while BIP's profits would climb by around 21%. Clearly, this deal boosts BIP's earnings not only on a company-wide basis but also on a per-share basis, which is what should be most important to investors.

I liked BIP before the deal, and I believe that the deal makes BIP an even better investment. Not only will BIP's profit climb on a per-share basis, but BIP also expands its business, making the company even more diversified and thus resilient versus headwinds for single business units. The long-term contracts that TRTN has in place guarantee that the assets that BIP will acquire will generate sizeable cash flows for many years, which should allow BIP to pay down debt quickly if the company wants to do that.

Income investors that primarily held TRTN for its dividends can be happy with BIP as well, since BIP also pays a sizeable dividend of 4.4% and since BIP has a history of increasing the payout over time. This will, I believe, not change following the takeover.

Takeaway

Triton International is not a shipping company but has been lumped in with shipping stocks by many investors. Its shares were thus rather inexpensive, despite contracted and secure cash flows. This made for an attractive investment proposal, which is why I have been an investor in Triton for a while. But as it turns out, BIP has seen the value in TRTN stock as well, which is why the two companies agreed on a deal.

I believe that the deal is fair for TRTN holders, which get a sizeable premium, and I believe that the deal also makes sense for shareholders of BIP, as it should be easily accretive even before any synergies are captured. As an investor in both companies, I like the deal.

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