Brookfield Infrastructure has entered an agreement to acquire Genesee & Wyoming in a US$8.4 million deal, of which Brookfield Infrastructure will contribute US$500 million of equity with the remainder to be bought by its institutional partners. This latest purchase comes after some solid first-quarter 2019 results and will be funded by Brookfield Infrastructure’s considerable liquidity, which, at the end of that period, totalled US$1.9 billion. This deal is expected to close by the end of 2019 or in early 2020.
It will act as a powerful growth driver, giving Brookfield Infrastructure exposure to a portfolio of 120 short-line railroads spanning around 26,000 kilometres. These assets include 114 railroads covering 21,000 kilometres in North America, Australia’s 2,200-kilometre Tarcoola-to-Darwin railroad, and a range of rail maritime intermodal and freight assets in the U.K. This enhances Brookfield Infrastructure’s existing rail assets and will give earnings a solid boost once complete.
Earnings will continue to grow as Brookfield Infrastructure works on bedding down and unlocking synergies from recent acquisitions, including leading South American data centre Ascenty, an Indian natural gas pipeline, and Western Canadian natural gas infrastructure from Enbridge.
The strength of Brookfield Infrastructure’s operation can be seen in its first-quarter 2019 results. While net income of US$30 million was a seventh of what it had been a year earlier, funds from operations (FFO) shot up by 3.5% to US$0.88 per unit. The sharp fall in net income can be attributed to a range of causes, including same-quarter 2018 net income being bolstered by the after-tax proceeds of US$209 million from the sale of Brookfield Infrastructure’s Chilean electric utility.
Meanwhile, FFO grew because each of Brookfield Infrastructure’s businesses reported organic growth in excess of the 6-9% targeted.
The latest round of acquisitions, as they are completed and incorporated into the partnership’s operations, will ensure that it can continue to achieve or even exceed that goal.
An important reason for owning Brookfield Infrastructure is its proven history of delivering considerable value for unitholders through its strategy of recycling capital and making opportunistic acquisitions of undervalued businesses not operating at their full potential.
Another powerful tailwind for growth is the ever-widening global infrastructure gap. According to consultancy McKinsey & Company, there is a US$800 billion shortfall in spending on infrastructure globally, and most of that is occurring in developing nations because of fiscal constraints and rapidly growing populations. That will boost demand for the utilization of Brookfield Infrastructure’s assets, leading to higher rates along with demand for further investment.
The partnership’s globally diversified portfolio, with considerable exposure to rapidly growing emerging markets, includes India, China, Brazil, Colombia, and Chile. This further boosts its growth prospects when the global economy is performing well while helping to reduce its correlation to developed markets, thereby reducing the impact of a downturn in first-world nations.
What makes the partnership stand out as an investment is its solid defensive characteristics, including a wide, almost insurmountable economic moat, contractually guaranteed earnings, and the fact that it operates in oligopolistic markets. While investors wait for these attributes to give its stock a solid lift, they will benefit from the partnership’s regular sustainable distribution, which it has hiked for the last 11 years straight to yield a juicy 4.6%.
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Fool contributor Matt Smith has no position in any of the stocks mentioned. Brookfield Infrastructure Partners and Enbridge are recommendations of Stock Advisor Canada.