HICL Infrastructure has proposed absorbing the Renewables Infrastructure Group (TRIG) into a single £5.3bn behemoth, it was announced this morning.
The move has drawn criticism from industry experts, who warned that the deal raises more questions than it answers, particularly for HICL shareholders. The proposal would transfer TRIG’s renewable assets into HICL and offer TRIG investors a £250m partial cash exit, but early market moves showed a stark split in sentiment: TRIG’s shares rallied while HICL fell.
The reaction captured the underlying tension, according to AJ Bell investment director Russ Mould.
“Combining two unloved investment trusts is not a guaranteed way to make them more appealing. Shares in HICL Infrastructure dived 8% after announcing plans to gobble up renewable energy specialist TRIG,” he said.
TRIG had been trading on a 34% discount to net asset value before the news and Mould said its investors “should be happy they’re being offered a partial cash exit at a 10% discount to 30 September’s NAV [net asset value]”.
The problem is on the other side of the table: “The big unknown is whether HICL shareholders want exposure to a renewable energy specialist and the share price reaction would suggest not.”
HICL has spent several years contending with widening discounts as rising interest rates eroded valuations across the infrastructure sector. Its defensive pitch has rested on stable, inflation-linked cashflows from assets such as private finance initiative (PFI) projects, regulated utilities and transport concessions.
Folding in a large portfolio of wind and solar farms would introduce exposure to power prices, weather-driven generation and shifting subsidy regimes – risks that differ markedly from HICL’s traditional holdings.
Jefferies analysts argued the merger therefore represents a solution in search of a problem. “While we are generally supportive of consolidation efforts, our initial take is that this proposed merger is an unwarranted solution for both parties,” they said.
In their view, HICL “needs more of a roadmap on how its portfolio will develop over time”, but broadening its mandate into renewables “is unlikely to be welcomed by shareholders given a different risk profile (power prices, generation, subsidy risks etc) and despite the resulting enhancement to its dividend under the proposals”.
They added that TRIG investors already have a mechanism to influence the trust’s future direction through next year’s continuation vote. With a diversified portfolio providing scope for asset sales, Jefferies said TRIG shareholders “could engender a capital return of greater than the approximately 10% of NAV currently being offered”.
James Carthew, head of investment company research at QuotedData, was equally doubtful about the combined structure.
“Take two investment companies that are already amongst the largest, most liquid and diversified in their respective sectors, knock them together to create an infrastructure conglomerate with so many moving parts that it’s much harder to analyse, retain all the same assets and seemingly prioritise more of the same over discount control, pay out a token amount of cash, declare a focus on growth while raising the dividend, and what have you created?” he asked.
“Will shareholders nod this through or has the firing gun sounded for competing bids to emerge for these vehicles?”