CA - Triton Gets A Deal From Brookfield: Time To Head For The Exits

2023-04-12 13:30:00 ET

Summary

• Triton got an amazing deal from Brookfield this morning.
• The collar protects the value of the deal, but we think it will be broken to the downside.
• We suggest places to put your money and tell you why we would take the exit on the common and preferred shares.

The deals just keep on happening. Just yesterday we saw The RMR Group Inc. ( RMR ) orchestrate a marriage between two companies that it managed. Today, Brookfield Infrastructure Partners ( BIP ), ( BIPC ) made to by Triton ( TRTN ) at a massive premium.

BIPC and its institutional partners jointly announce a definitive agreement for Triton to be acquired in a cash and stock transaction valuing the Company's common equity at approximately $4.7 billion and reflecting a total enterprise value of approximately $13.3 billion.

"We believe this transaction provides an excellent outcome for all of Triton's stakeholders," commented Brian M. Sondey , Chief Executive Officer of Triton. "The sale price provides significant value to our investors and represents a 35% premium to yesterday's closing share price.

"Triton is an attractive business with highly contracted and stable cash flows, strong margins and a track record of value creation," said Sam Pollock , Chief Executive Officer of Brookfield Infrastructure. "This transaction provides Brookfield Infrastructure with a high going-in cash yield, strong downside protection, and a platform for growth in the transportation and logistics sector.

Source: Seeking Alpha

The deal is fantastic for TRTN shareholders as this gives them an all-time high exit price. The price is a solid 16% above the $73.00 share price that investors saw in early 2023.

Even better for TRTN, the exit is almost fully guaranteed. Most deals seem to overplay the premium paid as a good part of the deal is in acquirer's stock. That stock inevitably falls as part of the deal and the acquired company's investors tend to make less than implied in those glamorous press releases. Here, there were two twists to that equation.

The total consideration of $85.00 per Triton common share ("Triton Share") will consist of $68.50 in cash and $16.50 in BIPC class A exchangeable shares ("BIPC Shares") (NYSE: BIPC, TSX: BIPC). At closing, BIP's equity investment is expected to be approximately $1 billion, inclusive of the BIPC shares.

The stock portion of the consideration is subject to a collar, ensuring Triton shareholders receive the number of BIPC shares equal to $16.50 in value for every Triton Share if the ten-day VWAP of BIPC Shares (measured two days prior to closing) (the "BIPC Final Stock Price") is between $42.36 and $49.23. Triton shareholders will receive 0.390 BIPC Shares for each Triton Share if the BIPC Final Stock Price is below $42.36, and 0.335 BIPC Shares for each Triton Share if the BIPC Final Stock Price is above $49.23. With the collar, between 18.4 and 21.3 million BIPC Shares will be issued to Triton shareholders.

Source: Seeking Alpha

The first twist here is that the price is predominantly in cash. The cash portion alone was more than the stock price before the deal. The second as explained above, TRTN shareholders are protected from a mild drawdown in BIPC share price. This gives the deal a very solid feel and TRTN management must be congratulated for negotiating such good conditions.

Implications For BIPC

This is a very small deal for BIPC. The total enterprise value is large, at $13.3 billion, but keep in mind that TRTN is not being integrated into BIPC . BIPC will have an equity investment and TRTN's rather massive debt load will trade on its own merits. In fact, with BIPC's partners doing the bulk of the heavy lifting, the actual BIPC investment is incredibly small.

At closing, BIP's equity investment is expected to be approximately $1 billion, inclusive of the BIPC shares.

Source: Seeking Alpha

So while we see this as possibly a bad price to buy a semi-cyclical company at the peak of the cycle, BIP's risk is very little. TRTN has long leases in place and assuming BIP is aggressive in removing dividends out, there's little long-term risk to the actual investment being put in. Further, BIPC intelligently continues to take advantage of poor decision making by investors. By that we mean the chronic premium put onto BIPC vs BIP. This is of course stupidly wrong, but works great for BIPC. The company is nicely issuing the expensive equity when it is trading at a big premium.

Implications For TRTN

Considering the setup, there's almost zero chance that this deal gets blocked. There are no monopolistic or regulatory challenges. The price is fantastic. Considering the price and the capital market conditions, we don't see anyone stepping in. Some may lament that this is at only 8.5X earnings, That is true but 8.5X is a lot for cyclical companies going into a recession. The market also has plenty of opportunities to deploy your cash. Even BIP for example (not BIPC), would be an interesting bet considering how it has underperformed TRTN and is far less cyclical than TRTN as a whole.

What To Do Now?

The pre-market action shows the excitement as BIPC has dropped a bit and TRTN has floated up to near the acquisition price.

Considering the deal is subject to close in Q4-2023, and the fact that TRTN can pay its regular dividends, there's still a modestly attractive total return till closing. Of course the assumption there is that BIPC holds over the low end of the collar. If BIPC is trading at $30.00 by closing, TRTN shareholders will get $11.70 in BIPC shares ($30 X 0.39). Total deal value would then be $80.20 and you would have a net loss from this price. While investors may scoff at $30.00 for BIPC, bear in mind that it just implies BIP falling 15% and BIPC trading at a zero premium to BIP. Below we have shown the BIPC-BIP spread and you can see that on two occasions we have been near the flatline.

Considering that one happened October 2021, a time when markets were at their frothiest best, don't rule out a repeat in 2023. We would sell and move out or hedge using options.

The Bigger Consideration

TRTN has a legion of preferred shares.

1) 8.50% Series A Cumulative Redeemable Perpetual Preference Shares ( TRTN.PA )

2) 8.00% Series B Cumulative Redeemable Perpetual Preference Shares ( TRTN.PB )

3) 7.375% Series C Cumulative Redeemable Perpetual Preference Shares ( TRTN.PC )

4) 6.875% Series D Cumulative Redeemable Perpetual Preference Shares ( TRTN.PD )

5) 5.75% Series E Cumulative Redeemable Perpetual Preference Shares ( TRTN.PE )

These will remain outstanding and become orphaned once TRTN common shares are delisted.

Upon the closing of the transaction, Triton's common shares will be delisted from the New York Stock Exchange. Triton's Series A-E cumulative redeemable perpetual preference shares will remain outstanding.

Source: Seeking Alpha

Brookfield entities are known for dialing up asset level leverage and TRTN already is at the high end of that.

The preferred shares are two notches below the IG rating of the debt.

Triton's preferred shares are rated two notches below the company's Long-Term IDR, reflecting the deep subordination and heightened risk of non-performance relative to other obligations. Fitch has afforded Triton's preferred shares 50% equity credit given the cumulative nature of the distributions, the fact that the preferred shares are perpetual, and the lack of change of control provisions and events of default.

Source: Fitch

So the preferred shares have abnormal risks here down the line if leverage were to be further dialed up. We would definitely exit these and look for better opportunities elsewhere.

Please note that this is not financial advice. It may seem like it, sound like it, but surprisingly, it is not. Investors are expected to do their own due diligence and consult with a professional who knows their objectives and constraints.

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