Electricity transmission. Just reading the words can be slumber-inducing. But for investors boring, regulated businesses produce something that's highly desirable: predictable cash flow.
But stable cash flow also tempts managers and directors to load such vehicles up with dollops of debt. Take Spark Infrastructure.
The group owns 49 per cent of ETSA, the rather staid South Australian electricity transmission network, as well as 49 per cent of Victorian operators Powercor and CitiPower. These assets sport billions in debt. On top of that, they also have expansion plans requiring the investment of more than $4 billion over the next five years.
For a business that produced a respectable but comparatively small $150 million in operating cash flow last year, that's quite a burden. So where does that leave investors who last year enjoyed total distributions of 13.56 cents and a current yield of 11.3 per cent?
Distributions cut
For a start, management cut distributions by 27 per cent to the recent level to conserve cash. But last month Spark also informed shareholders of a ''strategic review'', which intrigued me.
After extensive analysis, we recommended Spark to our members in July last year at $1.085. It's performed better than our initial hopes, delivering a 12.5 per cent yield in less than 12 months plus a 10 per cent capital gain.
The interesting thing about this ''strategic review'' is that the language is ambiguous enough for it to cover everything from to a dilutionary capital raising to a takeover offer. Spark is 8.7 per cent owned by Cheung Kong Infrastructure, which together with Hongkong Electric owns the remaining 51 per cent of ETSA, Powercor and CitiPower.
Steady, regulated assets
Perhaps, in this post-GFC world, Cheung Kong likes the idea of investing billions in steady, regulated assets. But it could also be that they see an opportunity to rake in more risk-free asset management fees (Spark's management agreement with a joint venture between Cheung Kong and Deutsche Bank looks unfavourable to us, though we're prepared to live with it at the right price).
At least one major broking house is pushing the line that a takeover is likely. Yet the recent sagging performance of the stock price suggests a different story.
Either way, it looks like significant change is on the cards. One scenario would see a higher stock price and a profit handed to investors. Another would see them reaching into their pockets to pump further capital into Spark or - importantly - lower distributions.
It's a classic example of how a seemingly simple investment situation - the ownership of steady, regulated assets, in this case - can be much more complicated than it first appears. This one currently has our analysts scratching their heads.
This article contains general investment advice only (under AFSL 282288).
Greg Hoffman is research director of The Intelligent Investor which provides independent advice to sharemarket investors. BusinessDay readers can enjoy a free trial offer at The Intelligent Investor website.
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