There is a reason why 60 percent of my investment capital is tied up with the Brookfield family of companies...In a word....communication...When an investor is partnered up with management teams like the ones at Brookfield, there is a re-assuring sense of not only knowing what is going on, but being part of something worth while...
Brookfield Business Partners (“BBU”) had an active and
successful 2019. Company EBITDA increased to over $1.2 billion and Company FFO
increased to over $1.1 billion or $7.86/unit. Our strong financial performance
was a result of contributions from recent acquisitions and improved performance
across our businesses. Since the beginning of 2019 we invested over $2.5
billion to acquire new businesses and generated over $1 billion from the
monetization of mature operations and distributions from our businesses. We
ended the year with $2.3 billion of liquidity, positioning us well for
continued growth in 2020.
Our overall objective
to create long-term intrinsic value per unit remains unchanged, and the
increase in BBU’s intrinsic value is evidenced, in part, by the growth of our
Company FFO per unit that has more than tripled over the last two years.
Most of our value creation has been achieved by acquiring high-quality
businesses for value and improving their underlying operational performance and
cash flows.
Embedded Value
We have meaningfully improved the overall quality of our
business operations over the past few years by recycling proceeds from the sale
of smaller businesses to fund the acquisition of larger businesses with
increased scale, stronger barriers to entry and more resilient cash flows. Our largest businesses today are market
leading providers of essential products and services. The resiliency of
these operations should contribute to more stable performance at BBU across
economic cycles.
In addition to
resiliency, our portfolio of businesses has considerable embedded value growth
which we will surface through initiatives currently underway. At
Westinghouse, to date we have achieved over $150 million in annual EBITDA
improvements and identified opportunities to achieve up to an additional $200
million in EBITDA. At Clarios we have an initial target of $300 million in
EBITDA improvement, and are developing additional plans to enhance cash flows
and create value.
In some instances, as in the case of Westinghouse, we have
been able to implement improvements and generate significant value in a
relatively short period of time. In other cases the repositioning of businesses
takes more time, as in the cases of GrafTech and North American Palladium, the
latter of which took several years to realize the value from our efforts. BRK
Ambiental (“BRK”) is a similar example of a company with significant potential
where we expect to realize meaningful value creation over time.
BRK Ambiental
At its core BRK is a simple business. It connects new
customers to its water and sewage networks, provides them with quality service
and receives a tariff for that service. At this stage in its evolution, BRK
invests virtually all its cash flows to improve and expand its service networks
and this expansion provides it with
significant organic growth.
Since acquiring BRK almost three years ago, we have focused on working closely with
management to better manage and execute BRK’s capital projects. During
2019, the company invested almost $250 million to expand its service networks,
adding over 700 kilometers of pipe and 70,000 new connections which resulted in
a 15% increase in EBITDA over 2018. Over the next five years, BRK expects to
further drive cash flow growth by investing $250 million each year in its
existing operations, all of which should
be self-funded.
Our efforts, working with BRK’s management team, to improve
business operations and create a performance-based culture, are having a
positive impact. Our strong emphasis on
safety has reduced workplace safety incidents by 70% and water quality programs
have more rigor as a result of being centralized and standardized to ensure
adherence with all required water quality standards.
In 2019 we closed the sale of BRK’s three industrial water
treatment operations at an attractive price and generated $175 million of net
proceeds that will be reinvested in the
company’s municipal operations and used to repay corporate debt. In
addition, last year BRK acquired the 10% interest of a minority partner in the Recife Recife
In addition to our operations-focused efforts, there have
been two meaningful improvements to the business environment for BRK. First, Brazil
Second, inflation is under control and interest rates have
dropped from a peak of over 14% in 2016 to 4.5% at the end of 2019. The
expectation is for inflation to remain stable and for slow but steady economic
growth. Brazilian investors that had grown accustomed to generating high
returns from money market funds are now seeking new ways to earn more yield
while maintaining inflation protection.
In this environment our business, with its long-term contracts and inflation
protected cash flows, is very attractive. While we still have lots of work
to do to fully realize on our investment thesis, BRK has become a more robust
company and remains well positioned to compound returns over the long-term.
BRK is just one example of the value creation potential
within our business today. We are executing a similar hands-on approach to
enhance value and improve cash flow generation across our operations. Not all
of our businesses will compound growth at the same rate, but if we successfully
execute on our plan, we believe our
existing businesses should increase BBU’s intrinsic value per unit by
approximately 30% over the next two years.
Strategic
Initiatives
Genworth Canada
In December we closed our acquisition of a controlling 57%
ownership interest in Genworth, the largest private sector residential mortgage
insurer in Canada
Genworth has
significant scale and a long track record of generating strong cash flows
across housing and business cycles. Our history of owning and operating
regulated insurance companies together with our ability to provide the seller
with speed and certainty of execution positioned us well to acquire this high
quality, cash generative business for tangible book value. Over time we believe
we can assist Genworth to enhance its business, optimize its capital structure
and improve the returns earned on its investment portfolio.
The business also continues to generate significant cash
flow, and since December Genworth has declared two special dividends and
returned over $300 million to shareholders. The strong cash flow profile of the company should continue to support
the return of capital to BBU and help fund our future growth, absent better
opportunities within Genworth.
BrandSafway
Subsequent to the year end, together with institutional
partners, we closed our acquisition of a 48% ownership interest in BrandSafway,
a leading global infrastructure services company that provides access,
specialized services, and forming and shoring solutions to the industrial,
commercial and infrastructure end markets. BrandSafway’s
scale and reputation as a leader in engineering innovation and productivity are
competitive advantages in a fragmented industry. The recurring nature of
BrandSafway’s services derived from the ongoing maintenance requirements of its
customers results in resilient cash flows across economic cycles.
We funded the transaction with $1.3 billion of equity, of
which we expect BBU’s share to be approximately $400 million for a 15%
ownership interest in the business. We look forward to working with our
partners and the management team to execute initiatives identified during our
due diligence, build on BrandSafway’s history as a service provider to Brookfield
Altera Infrastructure
In January, together with institutional partners, we
completed the privatization of Teekay Offshore for an aggregate investment of
$165 million, of which BBU funded approximately $75 million. We offered all
minority unitholders the option to exchange one publicly traded unit of Teekay
Offshore for one new economically equivalent unit in the private company.
Unitholders who exercised this option and elected to continue to invest
alongside us in the new private company hold an approximate 1% ownership
interest as our partners. We are
rebranding the company to Altera Infrastructure to reflect its identity as a
global energy infrastructure services company committed to operational
excellence and sustainable responsibility
IndoStar Capital Finance
(“IndoStar”)
In January, together with institutional partners, we
committed approximately $220 million to acquire a 40% interest in IndoStar, an Indian financing company primarily
servicing the used commercial vehicle segment. BBU expects to fund
approximately $75 million of the equity purchase price. India is an attractive market for us, and we
have been selectively pursuing opportunities over the last several years that
leverage Brookfield India
Overview of Operational Performance
Our
Infrastructure Services segment generated Company EBITDA of $468 million
for 2019. Performance at Westinghouse, our service provider to the global
nuclear power industry, was strong for the year and the business is now
achieving our targeted run-rate EBITDA of $600 million. Results in 2019 reflect
the benefit of our ongoing profit enhancement initiatives, strong performance
in the core fuel manufacturing and servicing operations and continued execution
on new plant projects. Supported by strong cash flow generated by the business
during the year, Westinghouse paid a
$275 million dividend of which BBU’s share was $120 million. Since our
acquisition just 18 months ago, we have received more than $250 million in
dividends which represents over 60% of the capital BBU invested to acquire
Westinghouse.
Altera Infrastructure’s contribution for the year increased
primarily as a result of our increased
ownership and also benefitted from increased shuttle tanker and towage
utilization. The shuttle tanker renewal program remains on track. The company
took delivery of one new shuttle tanker in January and the remaining six
shuttle tankers under construction are expected to be delivered over the next
two-year period.
Our
Industrials segment generated Company EBITDA of $619 million in 2019.
Results benefited from Clarios, our
global manufacturer of automotive batteries, which we acquired in April.
The business is performing well and carve-out
activities are progressing on plan with a focus on setting up new corporate
functions. Going forward we plan to
optimize our manufacturing operations and supply chain, and are considering
alternatives related to noncore activities and joint ventures.
In December we closed the acquisition of Robert Bosch GmbH’s
20% interest in our European battery manufacturing and sales joint venture.
GrafTech, our global manufacturer of graphite electrodes, generated reduced
EBITDA for BBU primarily due to our decreased ownership interest in the
business. Overall the company’s earnings
and cash flows continue to benefit from long-term supply contracts.
Our
Business Services segment generated $221 million of Company EBITDA for
2019. At Healthscope, our Australian
private hospital operator, we have progressed onboarding activities and now
have an experienced senior management team in place to execute our overall
business improvement plan. It is early days for our investment, but we are
working to address many of the challenges we
identified during our due diligence process to improve the company’s
operational discipline, achieve labor savings and optimize the occupancy of our
private hospital network. At our pathology services business, we recently
were awarded a new contract to provide laboratory and pathology services for a
local health district, reinforcing the business’ position as the market leader
in New Zealand
Financial performance at our construction services business, Multiplex, improved significantly
in 2019 compared to the prior year. During the fourth quarter 2019 the company
secured four new projects, most notably Westside Place Stage 2 in Melbourne
At our road fuel distribution and marketing business we are
focused on enhancing margins. Results were positively impacted by stronger
biodiesel blend margins in Europe , partially
offset by softer margins in our Canadian retail operations.
Capital Position and Liquidity
We ended the year in a strong financial position with total
liquidity of $2.3 billion including $274 million of cash and liquid securities
and $2.1 billion of undrawn credit facilities. Given the substantial growth in our overall business, we increased our
corporate debt facilities by approximately $750 million in 2019. We are
also confident we can generate substantial liquidity from the monetization of
our larger businesses, when it is appropriate to do so to fund our
acquisitions. As an example, GrafTech to date has returned more than $1.3
billion to BBU.
Looking Forward
The acquisition environment today is competitive. Valuations
in North America and other developed markets
are near historical highs driven by robust capital markets, low interest rates,
positive investor sentiment and substantial capital availability of buyout
firms. That said, we believe we are well positioned to continue making value
investments.
A key advantage of our business model is that we have a
broad mandate and the flexibility to invest in many forms. We are seeing opportunities arise from mispriced public companies that
become orphaned by the capital markets for one reason or another, causing them
to trade below their intrinsic value. We also benefit from being viewed as
a partner of choice for owners and existing management teams. We continue to review corporate carve-out
opportunities, where some operations perform well below their potential. Finally, despite robust capital markets,
from time to time stressed sellers simply need liquidity, often on an expedited
basis, which creates an opportunity to buy for value.
Our outlook for BBU is positive and we are well prepared for
2020 to be another active year for our business. We have built a global
investment team with significant scale and a local presence in key regions
where we operate around the world. We have a strong financial position with
multiple levers to generate liquidity and are confident in our ability to
continue to grow our business.
On behalf of everyone at BBU, thank you for your ongoing
interest and support.
Sincerely,
Cyrus Madon
Chief Executive Officer
February 2020
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