Hills Motorway rejects A$2b bid

Australian toll road operator Hills Motorway advised shareholders yesterday to reject a A$2 billion ($2.15 billion) takeover offer by rival Transurban Group, saying the bid was cheap and uncertain.

Hills said that if Transurban's bid failed, it would consider a restructuring to boost distributions to its owners above those promised by Transurban. It said that would not trigger state penalties that twice before had held Hills back from taking on more debt.

Transurban is looking to tap Hills' balance sheet and hook up its part-owned Sydney Westlink toll road, due to be completed in 2006, with Hills' existing M2 toll highway.

The largest owner of toll roads in Australia by market value, Transurban stuck to its January 31 offer despite Hills' rejection.

Hills said an independent expert had concluded it was worth about A$11.23 to A$11.64 a share, or between 2 and 6 per cent more than Transurban's offer as of last Friday.

"Certainly the valuation, in my opinion, is on the high side," said ABN Amro analyst Luke McNab.

Transurban's shares fell 2.8 per cent to A$7.28 in a firmer market, valuing its offer for Hills at A$10.70 a share, well below Hills' last trade of A$11, up 0.2 per cent.

Hills directors said Transurban's offer was inadequate, opportunistic, unnecessary and uncertain, and Transurban's business was riskier than Hills' with its single asset.

"The Transurban offer isn't just a near miss, it's way short of the mark in terms of valuation," Hills chairman Jock Murray said.

Transurban, which is offering 1.47 Transurban securities for each Hills security, has said the all-scrip acquisition could boost its annual dividend by as much as 28 per cent.

"Transurban will borrow from Hills' balance sheet to increase distributions to Transurban investors. Hills proposes to restructure for the benefit of Hills investors only," the statement said.

Under Hills' counterplan, distributions would increase to 80Ac in 2006 and 85Ac in 2007, at least 7 per cent more than distributions forecast by Transurban following a takeover and more than double Hills' current forecast distributions.

"If Hills can lift dividends and save money, why haven't they done so in the past?" said Michael Birch at Wallace Funds Management in Sydney. "This really increases risks for them."

"We remain confident in the prospects for the offer succeeding," Transurban managing director Kim Edwards said.

Fund managers said a key stumbling block for Transurban was to secure 80 per cent support for its bid.

If it falls short, Hills shareholders who accept the bid will face hefty capital gains tax, a big deterrent to accepting Transurban shares. If Transurban gets past 80 per cent, Hills owners pay no capital gains tax.

Transurban already owns an 8.1 per cent stake in Hills and has the support of two major Hills investors - Macquarie Infrastructure Group with 8.1 per cent and Colonial First State with 13 per cent.

Hills said legal advisers and independent experts said it could carry out the restructuring and increase debt without facing penalties that would force it to speed up bond payments to the state road authority or shorten the 45-year concession on the M2 motorway.

It gave no details on how it would avoid the penalties.

Transurban, the largest owner of toll roads in Australia by market value, owns an electronic toll road in Melbourne and a 40 per cent stake in the 40km Westlink M7 project in western Sydney, expected to be completed in August 2006.

The offer is the third to turn hostile in Australia in as many weeks. Virgin Blue Holdings last month rejected Patrick Corp's A$1.1 billion bid, saying its shares are worth at least 28 per cent more.

Southcorp told investors to reject Foster's Group's A$3.1 billion bid.

WMC Resources has spent more than three months fighting a A$7.4 billion bid from Xstrata.

- REUTERS, BLOOMBERG