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TORONTO — Canada's pension funds are expected to battle for ownership of Teranet Income Fund after a $1.7-billion bid on Thursday from the Ontario Municipal Employees Retirement System put the land registry company in play.
After turning down repeated takeover overtures over the past year, Teranet found itself the target of a hostile $11-a-unit offer from Borealis Infrastructure Management Inc., the infrastructure arm of the $52-billion OMERS fund. The price of units promptly soared above $11, as analysts predicted other buyers would emerge for the cash-cow trust, which holds a monopoly on Ontario real estate transaction fees.
“We felt the best thing to do at this point was to go directly to unitholders with a very good offer. Management has built a great company here, it fits right in our strike zone for infrastructure,” Borealis executive vice-president Rick Byers said. The takeover offer comes at a 27-per-cent premium to the price of Teranet units last Thursday, when The Globe and Mail first reported OMERS had approached the company.
Teranet signalled yesterday it expects a bidding war, saying in a press release that the company was already engaged in a strategic review and talking to potential buyers. “By announcing their intention to make an offer, it appears that Borealis has signalled its desire not to participate in the process that Teranet has established,” the company release states.
Borealis Infrastructure CEO Michael Rolland
Teranet's trustees are expected to make a recommendation on the OMERS bid once the pension fund files a formal offer. The trust has an exclusive licence to run the electronic land registration system in Ontario.
It has approximately 80,000 clients in the legal, real estate, government and financial sectors, along with an emerging expertise in health care.
Its industry dominance, and cash flow growth averaging 11 per cent annually over the past five years, make the company a “perfect fit” for OMERS' portfolio, Mr. Byers said. Teranet generated $167.6-million of distributable cash in 2007 on revenue of $254-million.
As a trust, Teranet faces a new, onerous tax regime in 2011. Pension funds such as OMERS are tax exempt, and place a premium on predictable, cash-spinning businesses like infrastructure plays. A number of trusts have been taken over by private equity funds since the federal Conservatives moved to shut down the sector in October, 2006, and OMERS has already been a buyer, snapping up retailer Golf Town Income Fund last September. These qualities and challenges, however, could make Teranet a target for other deep-pocketed investors.
“Other Canadian private equity players will also look at the transaction. The fact that the company holds a monopoly licence with the Ontario government for land registration suggests to us that Ontario-based players would be in the best position to receive the necessary change-of-control approval from the provincial government,” Scotia Capital analyst Catharine Sterritt said in a note to clients that predicted Teranet will end up fetching $12 a unit.
The Canada Pension Plan Investment Board and the Ontario Teachers' Pension Plan, both based in Toronto, and the Ottawa-based Public Sector Pension Investment Board were all mentioned by Ms. Sterritt as potential suitors. Executives at the three funds declined to comment, but did highlight their interest in infrastructure assets.
The prospect of a bidding war pushed Teranet units up 20 per cent on the Toronto Stock Exchange yesterday. More than 22 million units changed hands, equal to 15 per cent of the company's public float, as hedge funds stepped into the takeover play.
“We obviously like the business and it is obvious OMERS does as well. The market is certainly signalling that someone else could come along and make a higher bid for what is a very nice cash cow that has been trading relatively cheaply,” said Gavin Graham, chief investment officer at Guardian Group of Funds, which owns almost 2 per cent of Teranet's units.
However, not all financiers expect pension fund rivals to top OMERS bid, as Teranet was widely seen as being on the auction block for the past year. One private equity executive said: “Every banker in the country has pitched a Teranet buyout, but it's not clear just what the new owner would do to expand this business and justify paying a premium price.”
After 14 months of stalking Teranet, and three unsuccessful attempts to start negotiations, OMERS isn't aware of any competing bidders, and looks forward to closing the deal and working with the company's management team, Mr. Byers said.
If its bid goes through, OMERS plans to lobby the provincial government for an extension on Teranet's licence for the Ontario land registry, as the monopoly currently expires in nine years. There are other provincial land registry systems Teranet could work with, and opportunities to expand in new sectors, Mr. Byers said.
OMERS has been flexing its investment muscle recently through larger, direct acquisitions and currently has $5.5-billion in equity deployed through Borealis, Mr. Byers said. The pension plan's board has allocated up to 20 per cent, or about $10-billion, of the fund's assets to infrastructure. If successful, the Teranet acquisition would put it well within that limit, he added.
