Brookfield Infrastructure Announces Intention to Acquire Inter Pipeline Ltd. fOR C$16.50 Per Share in a Transaction Valued at C$13.5 Billion

Brookfield Infrastructure Announces Intention to Acquire Inter Pipeline Ltd. fOR C$16.50 Per Share in a Transaction Valued at C$13.5 Billion

Highly certain and credible offer delivering immediate 23% premium to Inter Pipeline shareholders

Brookfield Infrastructure willing to consider increasing its offer if granted access to due diligence

Brookfield Infrastructure reports an aggregate economic interest in 19.6% of the issued and outstanding shares of IPL, making Brookfield Infrastructure IPL’s single largest investor

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BROOKFIELD, NEWS, Feb. 10, 2021 (GLOBE NEWSWIRE) -- Brookfield Infrastructure Partners L.P. (NYSE: BIP; TSX: BIP.UN), together with its institutional partners (collectively, “Brookfield Infrastructure”), announces today its intention to pursue a privatization transaction in respect of Inter Pipeline Ltd. (“IPL” or the “Company”), pursuant to which it will offer to acquire all of the outstanding common shares of the Company (“IPL Shares”) not already owned by Brookfield Infrastructure, at a price per IPL Share of C$16.50 (the “Offer”).

Under the terms of the Offer and subject to proration, each IPL shareholder will have the ability to elect to receive, per IPL share, C$16.50 in cash or 0.206 of a Brookfield Infrastructure Corporation (NYSE: BIPC; TSX: BIPC) class A exchangeable share (“BIPC Share”). The share exchange ratio has been calculated based on the closing price of the BIPC Shares on February 10, 2021, the last trading day prior to this announcement. The Offer is fully financed, with a maximum cash consideration of approximately C$4.9 billion (representing 76.2% of the Offer’s total consideration) and a maximum aggregate number of BIPC shares issued of approximately 19 million (representing 23.8% of the Offer’s total consideration).

Financial and Strategic Benefits of the Transaction

Brookfield Infrastructure firmly believes that its Offer is in the best interests of all IPL shareholders and that shareholders should have the opportunity to determine what is best for their investment. Brookfield Infrastructure has a long and successful track record of acquiring large-scale infrastructure companies and believes its Offer is compelling for all IPL shareholders and stakeholders alike for the following key reasons:

Significant Premium to both IPL’s Recent Trading Levels and the Company’s Analyst Consensus Estimates

23% premium to the closing prices of C$13.40 per IPL Share and C$79.97 per BIPC Share on February 10, 2021, the last trading day prior to announcement of this Offer

28% premium to the 30-day volume-weighted average share prices of C$13.07 per IPL Share and C$84.87 per BIPC Share for the period ended February 10, 2021

10% premium to research analyst forward-looking share price targets, which average C$14.98 per share, as well as a significant premium to the trading levels of IPL’s relevant Canadian midstream comparable companies

Immediate Catalyst to Surface Value in a Security that has Significantly Underperformed in the Public Equity Markets

Despite a strong recovery in global equity markets and a return of commodity prices to pre-COVID levels, IPL’s share performance and credit profile continues to be strained

IPL has delivered the lowest 1-year and 5-year total shareholder returns among its Canadian energy infrastructure peers

Compelling Valuation and an Opportunity for Immediate Liquidity

Compelling valuation, despite the uncertainty of the timely completion and commercialization of the Heartland Petrochemical Complex (“Heartland”) anticipated by the Company within the next two years

IPL shareholders will have the option to elect to receive all of their consideration in cash, subject to an aggregate limit of approximately C$4.9 billion, representing 76.2% of the Offer’s total consideration

Opportunity to Participate in Brookfield’s Diverse Infrastructure Platform

IPL shareholders have an opportunity to receive an equity interest in a large-scale, global infrastructure company with a long-term track record of delivering compelling returns to shareholders

Brookfield Infrastructure Partners has delivered ~10% annual distribution growth and an 18% annualized total return since inception

Brookfield Infrastructure is Uniquely Positioned to Support IPL Through the Environmental Social & Governance (“ESG”) Focused Transition

Brookfield Infrastructure is one of the largest owners and operators of critical and diverse global infrastructure networks which facilitate the movement and storage of energy, water, freight, passengers and data

Brookfield is a responsible Canadian-headquartered company, and IPL will remain a standalone company based in Calgary

Brookfield Infrastructure recognizes that ESG sentiment among public investors is evolving at an unprecedented pace and we are confident that, as part of a larger, more diversified organization, IPL will benefit from Brookfield’s proven capabilities and stewardship around ESG transition investing

Offer Background

Brookfield Infrastructure is currently the largest investor in IPL with an aggregate economic interest in 84,341,555 IPL Shares, representing approximately 19.65% of the issued and outstanding Shares of IPL on an undiluted basis. Brookfield Infrastructure began to accumulate a position in the Company for investment purposes beginning in March 2020.

This position is comprised of beneficial ownership and control of an aggregate of 41,848,857 IPL Shares, representing approximately 9.75% of the issued and outstanding IPL Shares on an undiluted basis, and in addition, a cash-settled total return swap (the “Total Return Swap”) that provides Brookfield Infrastructure with economic exposure to an aggregate of 42,492,698 IPL Shares. The Total Return Swap affords economic exposure comparable to beneficial ownership but does not give Brookfield Infrastructure any right to vote, or direct or influence the voting, acquisition, or disposition of any IPL Shares.

In September 2020, Brookfield Infrastructure first approached the Company to discuss a collaborative strategic transaction, ultimately leading to the submission of specific indicative privatization proposals to the Company’s Board of Directors in November and December of 2020 based exclusively on publicly available information. The offer prices represented significant premiums in the range of 40% to 50% of IPL’s trading prices at various times during our discussions with the Company and were predicated on Brookfield Infrastructure’s ability to conduct confirmatory due diligence to validate the assumptions underlying its proposed price, in particular regarding Heartland. Each indicative proposal submitted to the Company by Brookfield Infrastructure also contained a "go shop" clause to afford the Company an opportunity to proactively canvass the market for a third party offer at a superior price following definitive agreement.

While subsequent correspondence between Brookfield Infrastructure and the Company was positive in spirit, ultimately the Company declined to engage constructively on a privatization transaction citing a view of intrinsic value far in excess of our assessment, largely driven by a more optimistic outlook of future growth and a recovery of commodity prices in excess of current market expectation. Brookfield Infrastructure believes the Company’s view fails to recognize the capital market realities facing energy-based infrastructure companies now and in the future.

Consequently, as the largest investor in the Company, Brookfield Infrastructure firmly believes it is in the best interest of all shareholders to be made aware of its efforts in this regard and be given the opportunity to opine directly on the Offer and for the Company to establish a process to facilitate its privatization.

Brookfield Infrastructure remains open to engaging directly with the Company on fair and balanced terms. Brookfield Infrastructure has made prior proposals to the Company in good faith, with an objective of receiving access to confirmatory due diligence to support a valuation for the Company above the Offer, indicatively in the range of C$17.00 to C$18.25 per IPL share. Brookfield Infrastructure has made this Offer based exclusively on publicly available information. Any ability for Brookfield Infrastructure to increase the Offer would be predicated on (i) being granted the ability to perform customary confirmatory due diligence, including but not limited to an ability to substantiate credible growth potential and the Company’s publicly outlined timeline and commercialization objectives for Heartland, and (ii) IPL not conditioning our access to diligence on restrictions that would preclude our ability to make any offer directly to shareholders, or otherwise inappropriately limit our strategic alternatives in regard to our current position on an appropriate timeline.

Offer Details

Full details of the Offer will be included in a formal take‐over bid circular to be filed with securities regulatory authorities and mailed to IPL shareholders. Brookfield Infrastructure will request a shareholders’ list from the Company and expects to mail the Offer and take‐over bid circular to IPL shareholders as soon as practical upon receipt of this list. The Offer will be open for acceptance for 105 days following the commencement of the Offer and will constitute a “Permitted Bid” for purposes of IPL’s shareholder rights plan as approved by IPL shareholders on May 7, 2020. The Offer is premised on there being 429,219,175 IPL Shares outstanding, on a fully diluted basis.

The Offer will also be subject to certain conditions of completion, including receipt of all necessary regulatory approvals, customary approval by the TSX and NYSE in relation to the issuance and listing of the additional BIPC Shares contemplated by our Offer, absence of material changes to the business and Brookfield Infrastructure owning not less than 66⅔% of the IPL Shares, calculated on a fully diluted basis, after taking up IPL Shares deposited under the Offer and not withdrawn (in addition to the non-waivable statutory condition that more than 50% of the outstanding IPL Shares, excluding IPL Shares beneficially owned by Brookfield Infrastructure, are deposited under the Offer and not withdrawn). Once the two‐thirds percentage acceptance level is met, Brookfield Infrastructure intends, but will not be required, to take steps to acquire all remaining IPL Shares in accordance with applicable law.

The BIPC Shares included in the Offer are the economic equivalent of units of Brookfield Infrastructure Partners L.P. (“BIP”) and are exchangeable for limited partnership units of BIP on a one for one basis.

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Source

https://money.tmx.com/en/quote/BIP.UN/news/8011731930885262/Brookfield_Infrastructure_Announces_Intention_to_Acquire_Inter_Pipeline_Ltd_for_C1650_per_Share_in_a_Transaction_Valued_at_C135_Billion

Stock Idea...Essential Utilities Inc. (NYSE: WTRG)

Stock Idea...Essential Utilities Inc. (NYSE: WTRG)

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Company Profile

Essential Utilities Inc., formerly Aqua America, Inc. is a publicly traded water and wastewater utility holding company with operating subsidiaries serving approximately five million people in Pennsylvania, Ohio, North Carolina, Illinois, Texas, New Jersey, Indiana, Kentucky, West Virginia and Virginia. In addition to its water/wastewater utilities, the company purchased a natural gas utility in March of 2020. The combined company has roughly 2,000 employees. The company has a long record (75 years) of paying dividends. 

Investment Thesis

BUY-rated Essential Utilities Inc. (NYSE: WTRG) has a solid business model, a history of steady earnings growth, and a growing dividend. We think the company will continue to provide shareholders with solid risk-adjusted returns. Essential stands to benefit from aging water infrastructure that, according to many industry observers, will soon require substantial investment. In 2019, EPA Chief Andrew Wheeler projected that $700 billion would be needed over the next 20 years to upgrade/overhaul water infrastructure. In August 2020, the American Society of Civil Engineers released a report detailing chronic underinvestment in drinking water and wastewater systems. The report highlighted the difficulties plaguing legacy systems, with many treatment facilities nearing the end of their design lives of 75-100 years. Looking ahead, we expect Essential Utilities to benefit from both new investment in water infrastructure and upgrades of existing systems.

In addition, Essential expects to grow its customer base. Essential has operations in states such as North Carolina and Texas, where population growth is above the national average. The company also benefits from an experienced management team and balanced rate regulation. Our 12-month price target is $55, raised from $50.

Recent Developments

On November 3, the company reported 3Q adjusted EPS of $0.23, in line with the consensus forecast but down from $0.38 in 3Q19. On a GAAP basis, EPS fell to $0.22 from $0.38 in 3Q19, as higher costs weighed on margins. Revenue rose 43% to $348.6 million. The Peoples natural gas utility, acquired in March 2020, contributed substantially all of the revenue growth.

In a transformative deal, which closed in 1Q20, the company acquired Peoples, a natural gas distribution utility, for $4.2 billion in cash, including the assumption of $1.3 billion in debt. (The Canada Pension Plan invested $750 million into the company to help it close the deal.) Peoples serves about 740,000 customers in Pennsylvania, Kentucky, and West Virginia.

Along with the 3Q earnings release, management reiterated its 2020 guidance calling for adjusted EPS of $1.53-$1.58, but shaded its guidance toward the high end of that range. The guidance assumes compound annual earnings growth of 5%-7% through 2022; infrastructure investments of $2.8 billion through 2022 to strengthen water, wastewater, and natural gas systems; and total customer growth of 2%-3% per year in the regulated water segment, dependent on regulatory approval.

Earnings & Growth Analysis

The company's top-line growth is driven by acquisitions, volume increases, and rate increases. In 3Q20, revenue rose substantially due to the March 2020 acquisition of Peoples. Excluding the impact of the acquisition, revenue rose 5.3%. The growth in water utility revenue reflected higher residential water usage, partially offset by lower usage from commercial and industrial customers.

On the regulatory front, to date in 2020, Essential's regulated water segment has received rate awards or infrastructure surcharges in Illinois, Indiana, North Carolina, Ohio, Virginia and Pennsylvania that total an estimated $21.0 million in additionally annualized revenue. The company currently has proceedings pending in Indiana, New Jersey, Virginia and Ohio for its regulated water segment that would add $2.8 million in incremental revenue. Additionally, Essential's regulated natural gas segment has received rate awards or infrastructure surcharges in Kentucky and Pennsylvania totaling an estimated $1.0 million in annualized revenue. Below the top line, O&M expense in 3Q20 increased 66.1% from 3Q19 due to Peoples O&M, partially offset by realized transaction and integration synergies.

Turning to our estimates, we are raising our 2020 adjusted EPS estimate to $1.58 from $1.55, in line with management's guidance. Our 2020 estimate implies growth of 7% from an adjusted $1.47 in 2019. We think the company will control costs and improve the efficiency of acquired assets, invest in infrastructure projects, and grow its customer base both organically and through acquisitions.

The company plans to invest $950 million in gas and water infrastructure in 2020, following investments of $550 million in water infrastructure in 2019. WTRG will use the funds to replace pipes and strengthen service reliability, among other projects. We look for continued growth in 2021 and are raising our adjusted EPS forecast to $1.66 from $1.64.

Financial Strength & Dividend

Our financial strength rating for Essential Utilities is Medium, the midpoint on our five-point scale. Our three main criteria include debt levels, fixed-cost coverage and profitability. Moody's rates the company's debt at Baa2 with a stable outlook and S&P rates the company an A.

WTRG had $9.3 million in cash and $5.4 billion in debt at the end of 3Q20. The company's total debt/total capitalization ratio was 53%. On April 13, the company completed a $1.1 billion public debt offering, with $500 million of 10-year notes issued at 2.7% and $600 million of 30-year notes issued at 3.3%, for a weighted-average maturity of 20.9 years and a weighted-average coupon of 3.0%. On April 14, the company priced $175 million of first mortgage bonds for Aqua Pennsylvania. The proceeds were used to pay off short-term borrowings and to fund an acquisition.

As of May 1, after considering the effects of these financings, the company had $1.1 billion in borrowing capacity on various credit facilities. On August 4, the Essential Utilities board approved a dividend hike. The quarterly cash dividend is now $0.2507, up from $0.2343. The annual distribution of roughly $1.00 yields about 2.1%. WTRG has grown its dividend at a 7% average annual rate over the last five years. It has paid consecutive quarterly dividends for 75 years, and has raised the dividend 30 times in the past 29 years. Our 2020 dividend estimate is $0.97 and our 2021 estimate is $1.04.

Management & Risks

Christopher Franklin has been the company's CEO since July 2015. Mr. Franklin is a 25-year company veteran, and previously served as president and COO of its regulated operations. The COO is Richard Fox, who has served in the role since 2015, and the CFO is Daniel J. Schuller, who has been in the position since 2018. In August 2020, management announced that Mike Huwar would succeed Joe Gregorini as president of Peoples. Mr. Huwar has more than 30 years of industry experience and an established reputation with Pennsylvania regulators.

The U.S. water industry is fragmented, with more than 53,000 individual water systems. Many of these systems cannot afford to meet the EPA's increasingly stringent standards, and have put themselves up for sale. Several companies have even sought to be acquired by Essential Utilities. The range of acquisition targets has also grown as cash-strapped municipalities look to monetize their utility assets. We believe that WTRG will be able to acquire additional municipal water systems in the coming years as cities look to raise cash to deal with COVID fallouts, such as increased unemployment.  Key risks for water utilities include the effect of adverse weather on revenues, regulatory issues (especially related to construction cost recovery), and potential environmental and safety-related liabilities. In addition, the utility's heavy capital needs create ongoing liquidity risk.

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Analysis by Angus Kelleher-Ferguson, December 11, 2020,

(Edited Argus Report)

©2020 Argus Research Company

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Postscript

It might be a good idea for growth investors to consider buying Essential Utilities either before the announcement of 4Q20 results on February 24, 2021, or sometime in the third quarter of 2021 at a point of lower natural gas demand and revenues, and thus potentially lower stock price.

Brookfield Asset Management…Q4 2020, Letter to Shareholders

Brookfield Asset Management…Q4 2020, Letter to Shareholders

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Overview

We ended the year with the best quarter on record. Given the environment and the extraordinary year, that says a lot for our business. Despite the turmoil and disruption, our investment strategies and the strength of our capital structure showed through. Results in our asset management business were very strong, with FFO up close to 20% over the previous year. Total FFO for the year of $5.2 billion was also a record, with realizations in the fourth quarter adding to results. On a go-forward basis, annualized asset management revenues including carry are now running at $6.5 billion, and with our next round of fundraising for our private flagship funds just beginning, the franchise is poised for growth.

We have also launched four new strategies, and while none of these are expected to be significant contributors to our results in the short term, they should all be meaningful in the longer term. These include investing in LP secondaries, the energy transition to net-zero carbon, technology and reinsurance.

With respect to reinsurance, as recently announced, we plan to distribute to you a new share of Brookfield Reinsurance as a special dividend. This share will be paired with BAM shares to enable us to efficiently operate this business, and it should be attractive to some of you to hold.

Post year end, we launched a tender offer to take our property company private. We did this as most property securities trade poorly in the market, despite the underlying real estate being valuable. Taking it private will offer us greater flexibility in managing assets, and by paying our co-owners of BPY an attractive price, which they can elect to receive in a combination of cash, preferred shares with a coupon commensurate with current yields, or BAM shares for continued upside in the stock market, we believe it is best for all concerned.

BAM Stock Market Performance was Good, All Things Considered

As an indication of returns that can be generated for investors, below is our latest tabulation of annualized compound investment returns over the past 30 years. For reference, $1,000 invested 30 years ago in Brookfield Asset Management is today worth $86,000. Some years have been fantastic, some were like 2020; but as demonstrated in this table, compounding reasonable returns over long periods of time is an incredible miracle of finance.

The returns earned by a company are the reflection of many factors, but over the longer term they are the result of the combination of a good strategic plan and relentless execution of that plan. Only in the longer term is it possible to look back at both strategy and execution, which if done well, tends to also compound over time. Furthermore, we believe the intrinsic value of a Brookfield share today is greater than the share price; this gives us a large margin of safety in our efforts to record reasonable returns over the longer term.

The Market Environment was Unforgettable

Much has been said about 2020, and it surely was one of the most unusual years in memory. GDP in every country dropped precipitously, stock markets plummeted then recovered, central banks collapsed interest rates to zero, and money with little risk became virtually free. Many businesses were shut down, most worked from home, people were afraid, plane travel declined 98%, Brexit happened, and a new U.S. president was elected.

As the year turns over to 2021, markets are strong, borrowing costs are low, money is available to well capitalized borrowers, stock price multiples for many businesses are extremely high, and pharma companies have come through in amazing time with vaccines that are now being distributed. Our expectation is that economies will regularize as the at-risk populations are vaccinated, and as the death and hospitalization numbers decline. This is starting to happen now—albeit unevenly—and as governments and people get comfortable enough to resume a more normal life, we expect we will see a strong recovery in economic numbers starting now and into 2022.

With no meaningful inflation on the horizon and high unemployment numbers, there is an expectation that interest rates will stay low and that stocks that were not bolstered by the pandemic trade will recover. Other good companies that have elevated multiples either will be proven to deserve them, or their securities may trade sideways for a time, until their results catch up with their share prices.

Our operations are highly geared to the economic recovery. As a result, we should be able to grow the value of our businesses coming out of this recession while hopefully narrowing the gap between the intrinsic value and the trading price of a Brookfield share. Like most businesses, we are pleased to see 2020 behind us, and we look forward to 2021/2022.

Our Business was Strong, Despite Headwinds

During the fourth quarter, we generated a record $2.1 billion of FFO, an increase of 75% over the same period in 2019. Full year FFO was $5.2 billion, showcasing the resiliency of our underlying businesses. This is even more remarkable, as up to 20% of our businesses were shut for months during the year and some are still recovering. This should mean that as the global recovery takes hold, our results will get even stronger. All of this led to record total cash available to shareholders for distribution and/or reinvestment (CAFDR) of $3.1 billion or $2.01 per share in 2020.

Asset Management Performance was Good and is Getting Better

Our asset management franchise had a strong year in 2020. We increased total assets under management to $600 billion and fee bearing capital to $312 billion. Annualized fee-related earnings and target carried interest are now $6.5 billion on an annualized basis.

In total, we raised approximately $42 billion across our private fund strategies. This included capital for some of our flagship funds, and we also made great progress in raising capital for our perpetual core private fund offerings. We now have approximately 20 different return strategies across our five main investment verticals that span senior debt to opportunistic equity. These included $13 billion of commitments for our latest distressed debt fund and $9 billion for perpetual core strategies. We also held a final close on our second infrastructure debt fund of $2.7 billion.

Despite the challenges of 2020, we generated approximately $1.2 billion of carried interest during the year and now have $4.7 billion of accrued unrealized carried interest on capital that has been invested. The benefits of the focus our funds have on critical service assets with contracted, leased or regulated cash flows were also highlighted in 2020, with valuations holding, and in some cases even increasing as a result of their income durability. We have re-initiated asset sales that had been delayed earlier in 2020, and demand for these assets has been strong. We recently announced a number of sales that we expect to close in the coming months; if they close as expected, 2021 should be another strong year.

At our Investor Day, we laid out our plans for the next round of flagship fundraising, with a target of $100 billion. Our flagship credit fund is off to a great start. We recently launched both our fourth flagship real estate fund and our new Global Transition Fund, which is focused on decarbonizing the global energy grid.

Operations were Resilient

Our renewable power operations continued to deliver strong results in 2020, supported by a globally diversified asset base and long-dated, take-or-pay power contracts. During the year, BEP completed the privatization of TerraForm Power, and we recently announced the acquisition of a distributed generation platform in the U.S. Combined, these scale operations in solar, wind, hydro, storage and distributed generation position us well to participate in the decarbonization of the world’s energy supply.

Our infrastructure businesses were extremely durable during the year. With 95% of the cash flows backed by regulated or contracted revenue streams stemming from critical infrastructure assets, earnings were largely unimpacted by the economic shutdown. We continued to expand our investment in data infrastructure, which is in a multi-year growth trend. We acquired a portfolio of 137,000 communication towers in India, which will capitalize on the rollout of 5G and other future technologies. We are also well positioned to participate in the global infrastructure investment and privatizations that are likely to follow as a result of both the sizeable debt that governments have taken on in recent months and their need to stimulate their economies.

Within our real estate business, most of our assets performed well in 2020. Our office portfolio is largely backed by long-dated leases to high-quality tenants, and rent collection was only marginally impacted. While our retail and hospitality assets faced challenges, in those markets where governments began slowly lifting restrictions, we have seen a steady rebound in performance. Foot traffic and sales per customer have increased significantly in our U.S. mall portfolio, and forward bookings for our hospitality assets are slowly recovering. During the year, we closed on the sale of a London office property, sold our U.S. self-storage business, and also disposed of a life sciences office portfolio—each well above both its acquisition cost and IFRS value.

Our private equity operations continued to grow, and we made a number of acquisitions, including a leading non-bank financial corporation specialized in commercial vehicle lending in India, and an Asia-based technology services platform focused on customer management services. We also announced the privatization of Canada’s leading mortgage insurer, and the merger of Norbord into West Fraser. We now own approximately 20% of this combined entity, which is the pre-eminent forest products business in North America.

Our credit platform delivered strong results in 2021. We were able to deploy $22 billion during the year, capitalizing on the March/April market dislocation, and other opportunities. We expect further opportunities to arise as government stimulus rolls off and companies need to recapitalize. The final close of our distressed debt fund is likely to take place in the first half of this year; it already is the largest distressed debt fund we have raised.

Privatizing our Property Business

In early January, we announced a proposal to acquire the balance of BPY that we do not already own. The simple story is that while the assets are exceptional and the tangible value is higher than the share price, property securities show no signs of trading near their intrinsic value. As a result, we believe our BPY partners will realize value far more quickly with the deal we are offering them.

Over the years, we have worked hard to execute our property business plans, with great success, but unfortunately the public markets have consistently struggled to appropriately value its assets. This is not unique to BPY; many property company securities have struggled to trade at NAV for years. In fact, we have taken private numerous real estate companies in our private funds for this very reason.

It has been evident to us for some time now that this portfolio and our approach to creating value are not well suited to the current public markets. To be clear, our view of the value of the portfolio has not changed. This is simply a classic example of assets not being what public market investors currently wish to invest into.

Privatizing the company will give us flexibility to realize the true value of the portfolio in the longer term by re-developing some assets, constructing new ones, selling some assets outright, and using various assets to create or grow perpetual, private, core real estate funds. The conviction we have in the latter has been enhanced by our recent success with our series of perpetual private real estate funds that we now have in North America, Europe and Australia.

Although the immediate impact of the transaction will be an increase to the size of our balance sheet, this will quickly reverse, and we expect that over the next five years we will end up with fewer real estate assets than we have today—because of this transaction and the flexibility it will offer us. In time, we will also re-create the fee streams in the private markets, benefiting our clients who have a desire to own this highest quality real estate.

The Next Beginning has Already Begun

We are onto the next beginning for Brookfield. With all our funds performing well during last year, our balance sheets in extremely good financial shape, and our alternative investment management franchise now one of the pre-eminent businesses around the world, we are onto the next phase of growth for Brookfield. We have widened the moat of our business globally and continue to add new products for our clients. With interest rates low, alternatives are the investment category that offers an attractive return for our clients, and we are innovating to provide them with new products.

We are also scaling up the size of our large flagship funds. Their size differentiates us and therefore enhances our returns. In addition, our clients are looking for income replacement with less volatility, and we are continuing to add perpetual core-plus products to our platform.

New areas of focus for us are investing in the transition of the economy to net-zero carbon emissions; reinsurance; technology investing, where we are moving from venture into full-scale technology private equity investing; and LP secondaries, where our clients are increasingly looking for scale managers. Each of these areas has the potential to provide a meaningful opportunity for our clients and for our business.

Climate Transition to Net Zero is Real and Accelerating

As we have noted for many years, overall, Brookfield is already net negative on scope 1 and 2 across our entire $600 billion of assets under management on an avoided emissions basis. We believe we are similarly net-zero carbon on a scope 3 basis and are now measuring the scope 3 emissions of our portfolio companies in detail. Having transformed our own business from a very intensive generator of carbon decades ago to net-zero carbon today, we believe we are well positioned to assist others with this change.

With decades of expertise and the access to capital that we possess, we plan to raise capital from our clients to assist other companies in moving to net-zero carbon. We are committing over $2 billion of our own capital to our Global Transition Fund and will be investing that alongside institutional clients who are like-minded in their goals. We believe this represents a unique opportunity to create a new asset class while addressing one of society’s current greatest needs.

We believe the world is at the beginning of a 30-year movement to net-zero carbon. This transition will affect virtually every business in every country. China, currently one of the largest generators of electricity from coal, has recently committed to being net-zero carbon across its entire economy before 2060. The new U.S. administration has committed to clean energy by 2035, and the EU, the U.K. and Canada are all accelerating their energy transitions. There is now no disputing that the world overall is moving from fossil fuels to lower carbon energy—renewables, nuclear energy and potentially hydrogen.

Within the envelope of net-zero carbon, we will continue to own and operate certain essential infrastructure assets globally that transport fuel. We believe that natural gas will play an important role in this energy transition, particularly in Asia, and potentially serve as a bridge to hydrogen. Rest assured, when we acquire these assets, we will be laser focused on the duration of cash flows, and we will operate them with their contributions to the transition to net-zero carbon in mind and with plans to ensure they continuously do better. We believe the operating experience we have gained in transitioning from carbon-intensive to net-zero carbon ourselves will make us better owners of many of these assets.

Our Global Transition Fund is focused on the buildout of new renewables globally, as well as the operations surrounding investment by businesses to accelerate the transition to net-zero carbon. There are many companies that will have the capital and skills to do this themselves. Equally, there will be many that need our operating expertise and access to capital to achieve their goals. This is the objective of our new fund, and we are excited about what it can accomplish.

A Few Themes are Driving our Investing in 2021/2022

We invest in all of our businesses to maintain and grow them, but we seek to deploy the most capital in businesses or regions at opportunistic points in time when the opportunity to create greater incremental value exists. This changes constantly, but simply stated, we try to stay away from fairly valued markets and invest where capital is in short supply.

Our investing is also driven by themes that generally cross all of our funds and are longer term in nature. The themes that we believe are relevant for our business today are as follows:

1) Low interest rates will continue to drive demand for alternative investments. Interest rates appear to be set to stay in a lowish band for several years. As a result, alternatives are very attractive to investors. This provides an exceptional backdrop for our overall business.

2) Renewable energy is growing. The global electricity make-up is currently 25% from renewable sources, and this is set to grow to 50% or more over the next 30 years. The investment required to accomplish this is in the tens of trillions of dollars.

3) Technology is affecting all business, as it always has. The difference today is the pace of change, which brings with it great opportunity, but also risk. We are embracing this.

4) Alternative credit is here to stay. Capital from institutions and reinsurers will increasingly drive the credit markets. Alternative managers have the opportunity to scale up credit as a fixed income replacement for institutional investors.

5) Most real estate withstood the dramatic shutdowns in 2020, and while some property will be used in new ways in the future, there will be no major paradigm shift. Great real estate in great cities will continue to be just that. This will become evident once the global economy recovers.

6) Many businesses and governments require capital. While businesses have survived thus far by borrowing heavily, they now need equity. As a result, there will be attractive opportunities to invest in businesses, and to acquire infrastructure from governments.

Please Remember That You Own a Piece of Our Business

Lastly, we encourage you to focus on our business, not the share price. If there was ever a year to emphasize this point, it was 2020. Consider that the Price of BAM in US$ on a split adjusted basis, started the year at $38.58 and ended the year at $41.27. With a dividend of 1.25%, you earned a respectable 8% on your investment based on the share price. Except, given the extremes in the market seen in 2020, and depending on when you looked at the Price, you might have concluded that you had gained 18% if you looked in February, or a month later that you were down 44% when our shares traded at $21.57 in March. This is the behavior of Price; but not Value.

In the short run, Price is a function of supply and demand at any point in time, which is often influenced by the news of the day, short-term results, and the investor view of macro events that often have nothing to do with the company. This has always been true, and is even more so today with the emergence of ETFs, indexing, social media, the 24-hour news cycle and all the information bombarding investors. Value, on the other hand, is the net present value of future cash flows based on assumptions for growth, discounted back to the present at an appropriate interest rate. The Price of a publicly traded security is very often not the Value of it; sometimes it is higher, and sometimes lower. From time to time they can converge—but not that often.

The Value of Brookfield based on our published plan value metrics was $57 at the start of 2020 and $66 at the end. After accounting for the dividend, your Value increased 17% over the year. This was very respectable, especially given the environment, and it included write-downs from some businesses that got hit in the short term with the shutdowns.

If we were a private company, we would simply report our Value calculation and the metrics behind it. You would likely have been thrilled with 2020. We actually were. On the other hand, the movement of Price often distracts investors from focusing on the Value of a business. We encourage you to focus on Value and try to not be distracted by Price.

Closing

We remain committed to being a world-class asset manager, and to investing capital for you and the rest of our investment partners in high-quality assets that earn solid cash returns on equity, while emphasizing downside protection for the capital employed. The primary objective of the company continues to be to generate increasing cash flows on a per-share basis, and as a result, higher intrinsic value per share over the longer term.

And do not hesitate to contact any of us should you have suggestions, questions, comments or ideas you wish to share.

Sincerely,

Bruce Flatt

Chief Executive Officer

February 11, 2021

Telus International surges in Debut after pricing IPO at Top of Range

Telus International surges in Debut after pricing IPO at Top of Range

Symbol : TIXT on the TSX

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The long-anticipated initial public offering of Telus International (Cda) Inc. is finally complete, with shares surging after hitting the open market Wednesday in Toronto and New York.

The more heavily traded listing on the New York Stock Exchange rose more than 30 per cent in an opening trade at US$33.10, compared to the IPO price of US$25 -- the high end of a range Telus Corp. identified during a recent road show. That strongly suggests strong institutional demand for the stock, and a belief that the business can keep growing.

Jeff Puritt, Telus International’s chief executive officer, said that its growth will not be in the form of moving away from its partnerships with the Canadian telecom firm.

“It seems unlikely to me,” Puritt said in an interview on Wednesday. “One of the nice things about a dual-share structure, it doesn’t unduly restrict our M&A ambitions, because there’s little-to-no dilution as a consequence of doing so.”

“We’ve enjoyed a highly symbiotic relationship with Telus since our inception and we anticipate that it will continue throughout the future.”

Telus International has quietly grown from a provider of customer contact-centre services for other companies, to a big, diverse digital services company that provides an ever-growing list of services to more than 600 clients, including marquee names like Google, Uber, and TikTok. Those services now include things like app development, fraud protection, social media monitoring and chat-bots. 

In its final prospectus, the company said it posted 17 per cent revenue growth in the first nine months of 2020, and plans to keep growing through acquisitions, new clients and deeper relationships with existing clients. Puritt said in the interview that he believes the IPO will allow Telus international to become “an acquirer of choice” in the future.

One key acquisition is still pending. Telus International is waiting for U.S. regulators to sign of on its acquisition of Lionbridge AI, a company that specializes in artificial intelligence learning by “tagging” data with information that helps AI systems to better understand the flows of data they take in. The regulators extended their review by a further 45 days, but Telus International has told investors it believes the deal with receive approval without conditions.

Telus Corp. will retain voting control over Telus International through its ownership of multi-voting shares.

Analysts believe Telus will eventually also seek IPOs for two other businesses it owns: Telus Health and Telus Agriculture.

“Eventually, yes,”  said Canaccord Genuity Analyst Aravinda Galappatthige about additional spinoffs. “But that is a fair distance away. Certainly not in 2021 and likely not even 2022.”

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Source

BNN-Bloomberg

https://www.bnnbloomberg.ca/telus-international-surges-in-debut-after-pricing-ipo-at-top-of-range-1.1558460