The Transurban Group (ASX: TCL) share price has fallen by 3% since 4 October 2021, with that decline occurring with a string of consecutive days of declines.
Whilst there haven’t been any material announcements this week, Transurban did make a major announcement on 20 September 2021.
A few weeks ago, Transurban announced that Sydney Transport Partners (STP) will acquire the remaining 49% of WestConnex from the NSW Government for $11.1 billion. After the deal is done, STP will own 100% of WestConnex.
If you’re wondering what Transurban’s relationship with STP is, the ASX share owns half of the business, alongside strategic partners, including new partner Caisse de depot et placement du Quebec.
WestConnex has almost 40 years of concession life remaining.
The additional ownership in WestConnex, including the extension of the M5 West concession from 2026, extends Transurban’s weighted average concession life to approximately 30 years.
Transurban said that WestConnex’s free cash generation, underpinned by “strong asset fundamentals” with potential upside from future infrastructure development and economic growth across Greater Sydney, is expected to support long-term group free cashflow generation and distribution for investors.
To fund the acquisition, Transurban said it was going to raise $4.22 billion at a Transurban share price of $13, which was an 8.3% discount to the previous closing price of $14.18.
The toll road operator also referenced capital releases. It currently expects to receive more than $600 million of potential capital releases until FY25 resulting from its increased stake in WestConnex. This is on top of more than $2 billion of potential capital releases expected to be achieved between FY21 and FY25 from a number of assets across Transurban.
Management are expecting the acquisition to add to free cash per security over the near-term, medium-term and long-term when including capital releases. In the near-term, it’s expected to be slightly dilutive when excluding capital releases because of the timing of the acquisition and capital raising.
How big is WestConnex?
Transurban pointed out that WestConnex is one of the largest road infrastructure projects in the world with an enterprise value of $33 billion.
It will form an approximate 70km network linking Sydney’s west with the Sydney CBD, Sydney Airport and Port Botany. By 2031, 40% of the Sydney population is expected to live within 5km of WestConnex.
Construction is nearing completion with 82% of projected capital expenditure spent to date.
Transurban said WestConnex is expected to benefit from traffic uplift from future road infrastructure investment across Sydney, including new major projects which will link into the asset over time.
Transurban provided distribution guidance for the six months ending 31 December 2021 of $0.15 per security. This compares to a $0.15 per security distribution for the first half of FY21.
Free cash for the first half of FY22 could be higher or lower than the distribution guidance because of COVID-19 uncertainty. The total FY22 distribution is still expected to be in line with FY22 free cash, excluding capital releases.
Including that interim distribution guidance and the final distribution from FY21, that puts the distribution yield at the current Transurban share price at 2.6%.