HICL and TRIG defend mega-merger that has 'appalled' investors

HICL Infrastructure (HICL ) and Renewable Infrastructrue’s (TRIG ) plan to merge into a £5.3bn mega-trust has ruffled some feathers, with shares in the former falling 8.1% by midday today.

Some analysts have speculated that the mismatch in portfolios will weaken the combined entity, but HICL manager Edward Hunt and TRIG’s Minesh Shah − both of whom work for InfraRed Capital Partners − told Citywire Investment Trust Insider that key shareholders have backed the proposal.

They held an ‘extensive investor consultation’ over the past week where major shareholders indicated ‘a good understanding of the merits for the deal’, which will be voted on at general meetings in December.

‘We clearly wouldn’t be out with an announcement like this if we didn’t feel that we’re well supported by the shareholder base,’ Hunt said.

However, CG Asset Management, which holds 18.5m shares in HICL representing 1% of its share value, said it was ‘appalled’ by the merger plan.

‘We can see no strategic rationale for the transaction,’ it said in an open letter. ‘TRIG’s portfolio and HICL’s portfolio are invested in entirely different asset classes and their combination will not result in material cost savings.

‘If investors wish to have exposure to both these asset classes they can easily do so by buying shares in both TRIG and HICL. However, many investors, like us, have made an explicit decision not to be invested in TRIG and have no desire to be forced to do so by the board of HICL.

‘We would urge [the board] to focus on the interests of HICL shareholders and to abandon this proposal. In the scenario that this proposal does proceed to a vote we will recommend to our fellow shareholders that they vote against it.’

In the vote, CG Asset Management will be up against much larger shareholders such as Rathbones and Brewin Dolphin, which are two of the largest owners of each. Together, they hold 20.4% of HICL’s shares and 14.7% of TRIG.

Rathbones and Brewin Dolphin were approached for comment.

Stifel analysts Iain Scouller and William Crighton noted it would be ‘administratively more convenient to own one larger entity’ for the wealth managers, but said other shareholders ‘want exposure to renewables or infrastructure, but not both’.

Even with their large stakes, QuotedData’s head of investment company research James Carthew questioned whether other shareholders would approve the merger given the enlarged trust would have ‘so many moving parts that it’s much harder to analyse’.

‘The whole is more than the sum of the parts’

Hunt disputed the claim that HICL and TRIG’s separate assets classes shouldn’t mix. Investors typically view renewables and wider infrastructure as two unconnected sectors, but he said this is increasingly not the case.

‘To date, the industry has structured itself arbitrarily into a renewables camp and diversified core infrastructure camp, but on the basis of the convergence of mega-trends around the energy transition in particular, we think now is the time to get in front of the next wave and recognise that investments in the energy transition are going to permeate all types of infrastructure investment,’ Hunt said.

‘Now’s the time to bring them together. We think the whole is more than the sum of the parts here in [that] we have the scale to attract a global investor audience, scale to press for further industry consolidation, and a balance sheet that has strength to be an enabler and driver of further investment activity.’

The merger would change HICL’s portfolio significantly, with TRIG’s renewables assets accounting for between 45% to 47% of the combined portfolio. Whilst some analysts touted this as a negative, Shah said the large shareholders it spoke to supported HICL becoming ‘a one-stop shop of pan-infrastructure exposure’.

Peel Hunt analyst Markuz Jaffe said the ‘material shift in underlying asset exposure’ may cause some initial concern – particularly for HICL shareholders – but comes with several benefits that make him ‘suspect this to be well received’.

It may be a hard pill to swallow for investors who view the asset classes as distinctly separate, but Hunt said the merger is reflective of the wider convergence across infrastructure he envisions.

‘Fundamentally, those portfolio construction considerations are important, but it’s also about what it unlocks for the investment strategy going forward,’ he said. 

‘In pulling this together, we’ve been very focused on what is the right infrastructure strategy for the next 20 years of infrastructure investment, rather than the last 20. We see that as very much the convergence of sectors between energy and traditional infrastructure.

‘We’re already seeing real convergence, and we think the sooner you acknowledge that and get in front of it, then you can really harness and benefit from better access to those infrastructure mega trends – that’s fundamentally what this combination is all about.’

Attracting new investors

The trust’s increased size will also make it more marketable to wealth managers, according to Hunt and Shah. However, with total assets of £3.3bn for HICL and £2.9bn for TRIG, both already exceed the liquidity requirements necessary for these investors.

Hunt and Shah said the increased scale is more for the benefit of overseas investors, who have even higher liquidity thresholds than wealth managers in the UK.

Foreign institutions also have a greater preference for total return strategies than their UK counterparts, who typically allocate towards renewables and infrastructure for their high income offering.

By combining HICL’s capital growth approach and TRIG’s high dividend yield – which will be lower in the combined vehicle – Hunt hopes to appeal to both parties.

‘It’s really about attracting new investors globally. When we take HICL and TRIG on the road to the US, Australia and Canada, a common refrain is that the company is quite small,’ he said.

‘We’re striking the right balance here with a strong income component which will keep existing shareholders happy, but also an enhanced total return proposition along with scale that make the company more appealing to a global investor base.’

Renewables consolidator

HICL’s integration of TRIG could pave the way for more acquisitions of renewable trusts, many of which are trading at steep discounts.

The average fund in the Association of Investment Companies’ Renewable Energy Infrastructure sector currently sits on a 32.7% discount, with some actively seeking buyers. Bluefield Solar Income (BSIF ) was the latest to launch a formal sale process for its £1.2bn portfolio of renewable assets.

Hunt said TRIG was ‘the most diversified of the renewable energy players’, making it easier to blend into the existing HICL portfolio but also acting as a springboard should it pursue more mergers in the space.

However, he stressed that additional mergers would be approached selectively and not on the basis of undervalued shares.

‘Clearly, listed markets are offering a higher return versus their net asset value, but it’s not the case that we’ll just go and start mopping up the sector,’ said Hunt.

‘That’s clearly a focus and an area we’ll look at carefully, but it’s about bringing the highest quality assets into the portfolio around the portfolio construction framework that we’ve set out for ourselves here.’