Queensland looks to raise billions in rail offer

Photo / Supplied

Queensland plans to raise billions of dollars selling shares of coal-train operator QR National in Australia's largest initial public offering in more than a decade.

The state will sell between 1.46 billion and 1.68 billion shares, or as much as 69 per cent of QR National, for A$2.50 to A$3 each, the offer document says.

This would raise between A$3.66 billion and A$5.05 billion ($4.78 billion and $6.6 billion).

Individual investors will pay no more than A$2.80 a share.

Rising demand for commodities in China and India may help Queensland lure investors as the state sells assets to replace an estimated A$14 billion of revenue lost during the recession.

Brisbane-based QR National expects earnings to surge 75 per cent in the next two years as coal shipments rise and mining companies expand projects in Western Australia.

"It has some leverage to the commodity cycle, which has appeal," said Grant Craighead, managing director and co-founder of Sydney-based research company Stock Resource.

"The growth should be quite transparent given the physical restraints that a rail business has, and that is what investors will look for."

The Queensland Government may sell additional shares equal to a 6 per cent stake to institutional investors if there's enough demand, it said.

The state plans to retain between 25 per cent and 40 per cent of QR National until at least 2012, Treasurer Andrew Fraser said.

The rail company, based in Australia's largest coal-mining region, will have a market value of as much as A$7.32 billion, which would rank it as the 30th-biggest firm on Australia's benchmark S&P/ASX 200 Index.

The stock will begin preliminary trading on December 1 and trade normally on the exchange in Sydney from December 7, the prospectus said.

Completion of the QR National IPO would make it Australia's largest since 1997, when the federal government raised more than A$14 billion selling shares of phone company Telstra.

It may also revive domestic IPOs after builder Valemus scrapped a planned A$1.39 billion offer in July.

"A successful float could be a trigger for a few more," said Sean Fenton at Tribeca Investment Partners in Sydney. "There's certainly a pipeline built up."

If institutional investors buy all the stock initially on offer at the top price, Queensland would raise A$5.05 billion.

Still, it's not yet clear how many shares will go to individuals.

As well as benefiting from a ceiling on the asking price, they'll also pay 10c a share less than institutional investors, according to the prospectus.

QR National expects earnings before interest, tax, depreciation and amortisation to increase 42 per cent to A$894 million in the 12 months ending next June, the prospectus said.

Earnings may rise 23 per cent the next year, the document said.

"There are elements of this business that could be more efficient," said Simon Cox, head of equity capital markets syndication at UBS AG, one of the banks managing the sale. "It was probably run as a social service, rather than a commercial enterprise. There's a high level of earnings certainty given the high percentage of contracted volumes." Based on the price range for the stock sale, QR National stock would trade at 21 to 25 times estimated earnings a share for the year ending next June and 17 to 20 times the following year's earnings, according to the sale document. That would make QR National stock more expensive than shares of Asciano Group, Australia's biggest listed port and rail operator.

Asciano trades at 19 times estimated earnings for the 12 months ending next June, and 16 times estimated earnings for the following year, according to data compiled by Bloomberg. It has a market value of A$4.9 billion.

QR National's projected dividend yield is as high as 2.5 per cent for the 12 months ending next June, and no more than 3.3 per cent the following year.

That's less than the average 4 per cent yield among members of Australia's benchmark S&P/ASX 200 index, according to Bloomberg data.

As well as UBS, Credit Suisse Group, Goldman Sachs & Partners Australia, Bank of America's Merrill Lynch unit and Royal Bank of Scotland Group are managing the QR National offering.

The banks will each receive a fee of A$3 million and share equally 0.8 per cent of the proceeds from the shares sold to institutional investors, the prospectus said.

BHP Billiton and a group of mining companies tried to buy the Queensland coal-freight network to eliminate the risk of an independent operator raising fees.

They scrapped the proposed A$5.1 billion bid last month after failing to meet their own and the Government's requirements for the offer.

Queensland is offering local applications priority to help lure investors. It is also selling plantations, roads, a port and a coal terminal.

QR National, which employs about 9000 people, last week announced a A$3 billion loan facility backed by 11 banks. The company operates 700 locomotives, 16,000 wagons and 2300km of track spread across Australia.

It transported more than 198 million metric tonnes of coal in the 2009-2010 financial year, according to its website.

Global demand for coking coal, used in steelmaking, may rise 14 per cent to 257 million tonnes this year and 6 per cent next year, driven by China and India, UBS said.

- BLOOMBERG