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Are toll road and infrastructure shares becoming the hottest M&A target?

Some investors might be put off by the high premiums commanded by our listed toll-road and infrastructure stocks, but high valuations and falling returns aren’t dampening the appetite of cashed-up offshore bidders.

If anything, we could see a number of stocks in this sector fall under the merger and acquisition spotlight.

Takeover activity has so far been focused overseas with the Australian Financial Review reporting a potential bidding war for Spanish toll road group Abertis after construction group, ACS, the parent of CIMIC Group Ltd (ASX: CIM), said it was mulling a counter bid. While OHL Mexico is also in play with IFM Australia involved in a possible bid.

These multi-billon dollar bids for private toll road assets have perversely made listed assets look cheap. Some experts think that it is actually more value accretive for listed players to start looking at merging with one another as these listed companies cannot compete with the deep pockets of sovereign wealth funds and pension funds.

Sovereign wealth and pension funds are willing to accept lower returns to secure a stable stream of income and do not face shareholder pressure to maximise returns.

This could well give our listed toll road companies an additional uplift, although it’s slim pickings as there are only two toll road operators on the ASX I can think of – Transurban Group (ASX: TCL) and Macquarie Atlas Roads Limited (ASX: MQA).

Both stocks have outperformed the broader market and are up over 12% each since the start of the year when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) is only around 2% higher.

However, other infrastructure companies are also well placed to benefit from the M&A interest as they share very similar investment characteristics as toll roads. This means expensive defensives like Sydney Airport Holdings Ltd (ASX: SYD), Qube Holdings Ltd (ASX: QUB) and Aurizon Holdings Ltd (ASX: AZJ) are also likely to find good support in this environment, and this is despite the risk of rising interest rates.

Infrastructure stocks are more sensitive to higher rates than most other sectors but there is still considerable debate on how quickly rates can rise and how much they can go up. On the other hand, the stronger Australian dollar, which has jumped above US80 cents this morning, may dampen M&A enthusiasm as it makes Australian priced assets more expensive for overseas suitors.

While it’s hard to see the sector getting sold off over the short to medium term, I think there are better investment options for those who are looking for attractive dividend paying stocks. To see some buying ideas from the experts at the Motley Fool, click on the link below to receive your free report.

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Motley Fool contributor Brendon Lau has no position in any stocks mentioned. The Motley Fool Australia owns shares of Sydney Airport Holdings Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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