Selling Atlas Arteria (ALX)
Australian Equities Income Portfolio
We have sold our position in Atlas Arteria (ALX) in the Income Portfolio and added to three existing holdings, namely Metcash (MTS), National Bank of Australia (NAB), and Rio Tinto (RIO), which offer similar dividend yields (~6%). Over the past twelve months, ALX’s total return has fallen by 14%, while the ASX200 has risen by 12%. This period includes the share price declines suffered after IFM ceased merger discussions with ALX.
IFM, the fund manager owned by a consortium of Australian industry superannuation funds, built a 15% strategic stake in ALX last year and in June entered discussions over a potential takeover offer, which was rebuffed by ALX. After IFM ceased merger discussions, ALX proceeded to acquire a 66.7% in Chicago Skyway for US$2 billion (~AUD$3 billion) through an equity raising at a 19% discount. The capital raising resulted in the issuance of 492 million new shares, increasing the total number of shares outstanding by 51%. Moreover, the acquisition reduced the distribution quality of ALX.
Traffic flows on Skyway have been dropping over the past decade. Despite a strong toll escalation (+10.9%) on Skyway from January 2023, the traffic on Skyway in CY23 will continue to be negatively impacted by the competition from adjacent public toll roads and the commencement of construction works on the overpass connecting the Indiana Toll Road to Skyway.
This transaction was vehemently opposed by IFM which it described as “significantly value destructive” and it has agitated for an overhaul of the Board. Notwithstanding IFM has grown its holding to 22%, it has not proceeded with a full takeover bid and the dilution and risk associated with the strategy pursued by ALX has diminished the overall asset quality of the company.