Will Abbott copy Fortescue and sell rail assets?

While it is by no means certain that Tony Abbott and the Liberal Party will win government at the upcoming election, the odds would certainly seems to be stacked against Prime Minister Gillard at this stage. With the high probability of a change in government in September, investors are considering how that might change the investment landscape.

A recent article in The Australian Financial Review speculated that shadow treasurer Joe Hockey had identified the interstate railway asset Australian Rail Track Corporation (ARTC) as a potentially saleable asset.

The ARTC owns and manages 8500 km of rail tracks spanning from WA, through SA, Vic, NSW and up to Qld. The public accounts show that last year it made $265 million in earnings before interest, tax, depreciation, amortisation and impairments. Ascribing a multiple of 10 times to these assets, would suggest a sale price of over $2.6 billion, however this would undervalue the assets which are valued on the books at $4.2 billion and include over $1 billion in recent capital expenditure.

A sale of ARTC would be in keeping with moves by other rail track owners who are looking to offload track assets as well.

Fortescue Metals Group (ASX: FMG) is looking for a minority partner to purchase a 30% to 40% stake in The Pilbara Infrastructure (TPI) subsidiary which houses Fortescue’s port and rail assets. The sale proceeds are expected to be used to reduce some of the $10 billion in debts that the company is carrying.

Joining the party is Aurizon (ASX: AZJ) (formerly QR National) which also recently announced it was looking to sell a minority stake in its track assets to improve the capital structure of the company.

There would no doubt be many interested parties for the ARTC assets including Macquarie Group (ASX: MQG) which is no stranger to infrastructure deals. The appeal of ARTC is the diversity of its revenue base and expansive track network, which contrasts to the higher risks associated with TPI’s exposure to iron ore and Aurizon’s exposure to coal.

Foolish takeaway

As investors it is always important to remember that for each transaction there is a buyer and a seller. While the government will make non-commercial decisions based on ideology – which can create a great buying opportunity for investors – companies like Aurizon and Fortescue have deep knowledge of what they are selling and it should never be underestimated that the seller in these instances knows more than the buyers.

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Motley Fool contributor Tim McArthur owns shares in Macquarie Group.

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