BUSINESS DAY TV: ‘JV puts Group Five on a new playing field’
Group Five CEO Eric Vemer discusses the company’s latest joint venture with global infrastructure leader Aberdeen
Eric Vemer is the CEO of Group Five.
BUSINESS DAY TV: Group Five is teaming up with Aberdeen Infrastructure Funds (AIF) to invest in toll roads in Europe, Turkey and North America. They’re setting up a new joint venture (JV) in which Group Five will hold a slight majority.
To discuss the rationale behind the deal and the projects they hope to pursue, we’re joined on News Leader by Group Five CEO Eric Vemer.
Eric ... the rationale for the deal, is it purely to use Aberdeen’s balance sheet for this expansion?
ERIC VEMER: Firstly, we have an existing portfolio of assets that have two projects in Poland and two projects in Hungary, which we have been maturing well ... they’ve had a very strong value accretion over the last few years.
So it’s, one, an opportunity for us to realise value on that portfolio and get cash behind those investments. And then to apply that cash in a JV with Aberdeen into new projects, and in so doing expand our portfolio of O&M (operations and maintenance) projects which is really the core target of Group Five.
BDTV: Looking at what has been said, it does bring in deep pockets as well. Your investments and concessions cluster has been a strong underpin for Group Five. What level does this strategic equity partnership now take that business to?
EV: It certainly puts us in a completely different playing field in terms of those very large infrastructure toll motorway projects that you see in Europe. These projects are typically a billion euro plus, and as a relatively small South African company to really have the scale and ability to sit at that top SPV (special purpose vehicle) table and talk with strength, it was always going to be very difficult. So we’ve got excellent experience and track record in developing and operating projects. This brings that deep financial muscle so that we are positioned far more strongly within negotiating the terms of these concessions with the clients.
BDTV: You do say that the money that you get for selling the stake, which is R633m, you’ll use to co-invest in those projects. Will you be co-investing equally though because it’s not going to go very far, R633m?
EV: That’s a good point. No, but we do anticipate as we go forward as the momentum of projects escalates that we will get diluted. But we have been able, with the structure that we have with Aberdeen, to at least ensure very good minority protections that will have equal voting rights in terms of those investments being made and, importantly, have secured Aberdeen’s support for us as their preferred operator in those key European, North American and Turkish markets.
BDTV: What scope for growth are we looking at exactly, and perhaps give us a hint as to the pipeline of opportunity that sits on the horizon.
EV: It’s a very active market. Intertoll has been hunting in these markets for a long time. The incubation time on these projects is long but having Aberdeen as partner there are many brownfield opportunities as well, existing toll road operations or concession-type companies that we can now, with Aberdeen, look to take over the operations far sooner, where Aberdeen’s interests are in the more mature profile of investments where there is much lower risk profile attached to the revenue streams in those projects.
So currently we have a list of over 50 projects that we have identified, as partners, which we will be targeting and a lot of those have traditionally been in Eastern Europe as Intertoll, but we are now looking at quite a number of projects in Western Europe. We recently secured a project in Ireland where there is a whole number of further projects, also in the UK, Norway and in Germany, as well as in our traditional Eastern European markets, including Hungary, Poland, Slovakia, Czech Republic and then a list of at least 15 projects in Turkey.
“We’ve experienced many shifts in the political dimensions in these markets since we entered”
BDTV: You’ve already partnered with Aberdeen in the ... project in Hungary. How does it work practically? Do you build the road and operate it, what do they do, how does it work?
EV: We, as partners, look to really run the company that owns the assets. Aberdeen is purely the investor while we ourselves are purely the operator. We do not construct the roads ...
BDTV: ... and you get paid after that...?
EV: Correct. It’s a completely different role to the investment role. We secure as operator, 100% of the operating contract and that is a long-term annuity type revenue profile. These projects are typically 30–40 years in length and we then operate the project over that time period. Then the contractor or construction company that we partner with, they typically come in for the first construction period. In these markets we are not constructing the actual roads. We partner with people such as Skanska, Bouygues, Laing Infrastructure, they’re also an investment company and various other construction groups in Europe.
BDTV: You highlight in the long term ... in the short term, very uncertain terrain that Europe is presenting, with Brexit initially. Now we’ve got Italian ructions as well. What level of risk does this bring ... does this shifting landscape bring for your business in the territory?
EV: We’ve experienced many shifts in the political dimensions in these markets since we entered. As Group Five Intertoll we’ve been in Eastern Europe for 15-odd years and these projects are long term, so they’re structured to survive the political winds of change that go from nationalisation to privatisation and so forth. And often there is just, particularly in the Eastern European markets, a basic underpin requirement in that these countries need the finance in order to invest in the infrastructure which is a key driver of economic growth. And that’s what this partnership with Aberdeen and ourselves is all about. Making the funds available under First World banking standards, leveraging the equity with our bank financing partners to develop and implement this infrastructure in these countries.
BDTV: And, of course, this doesn’t affect Intertoll Africa at all which sits separately from the JV and obviously another big contributor to your annual profits.
EV: Just to be clear, the JV we have with Aberdeen is really just in relation to the investments. We retain as Group Five, 100% of all of our current operating contracts, including Africa, as well as now with Aberdeen, more muscle to secure more operating contracts with their support, with Aberdeen focused in Europe, but it’s not unforeseeable that we may not do something similar for our African business.