IRR Comps: the Quickline Deal

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IRR Comps: the Quickline Deal

3 minutes
November 11, 2023 6:19 am

This month, instead of looking at a transaction changing hands through a willing buyer and seller, we are looking at a topic that could be a significant interest for investors in network utilities today: equity injection and, specifically, how the infraMetrics® platform can help you determine the IRR you should expect for such a transaction.

Currently, we see that the water utilities in the UK are raising money from their investors. This is all highly visible and well understood, so we won’t cover that today. Instead, we’re looking at the UK broadband providers that are rolling out networks around the UK. In this episode of deal of the month, we’re examining the equity injection of £40m into Quickline, by Northleaf Capital Investors and looking at what IRR the investors could expect to receive, based on the characteristics of the company.

Quickline, is a rural broadband network provider that has received four contracts to build and operate broadband services in Lincolnshire and Yorkshire. The company aims to provide broadband services to 500,000 homes in the coming years, using a mix of technologies such as Fibre to the Premises (FTTP) and 5G network. Quickline’s main revenue sources comprise of government subsidies for building broadband networks and customer subscriptions for subsequent use of these broadband networks. This information allows for the determination of its TICCS classification; as it is a broadband network provider, it is considered IC8060, a Data Distribution Network. IC8060 is furthermore a subset of IC80, Network Utilities. Since the revenues are from government and client contracts, it can be considered contracted (BM01).

Quickline is still building out its network, as a result it has relatively high investment and low profits. As seen in Table 1 below:

Table 1: Key Metrics for Quickline (QCL TOPCO LIMITED)

Year 31/12/2022 31/12/2021
Sales £4,752m £2,395m
EBITDA £(8,961) m £(1,321) m
Total Assets £146,641m £100,213m
Investment as a proportion of total assets 13.26% 5.57%
Leverage 64.42% 58.22%

Source: Annual Report Data, Scientific Infra & Private Assets

Table 2: InfraMetrics® Expected Returns (IRR) Ranges

Equivalent quintile Lower Bound Upper Bound
by Size (TA) 8.6% 9.1%
by Profitability (RoA) 11.1% 11.9%
by Investment (Capex/TA) 11.4% 11.9%
by Remaining Life 10.5% 10.7%
by Country Risk 11.7% 12.7%
Average IRR (Comps) 10.4% 10.9%

Source: infraMetrics®, Oct 2023

To build up the indicative expected IRRs, we turn to the infraMetrics® “Comps Builder” tool. If you’re a regular reader of this newsletter you know that this tool enables users to select relevant financial metrics based on TICCS-specific parameters, and firm characteristics (such as size, leverage, remaining life and profitability). Levering the infraMetrics® database, this tool also allows for the estimation of important metrics such as EV/EBITDA ratios and, in this case, expected IRRs.

Based on the firm characteristics as well as the TICCS classification above the expected IRR for the investment, if it was made in October 2023, was between 10.4% and 10.9%. What is more interesting is the way that the ratios were impacted by the different characteristics of the investment. As it is still young and undertaking major investment as a percentage of total assets, the expected return is increased. However, Quickline is a relatively small company compared with other infrastructure companies, this reduces the risk and lowers the expected return.

The example abovejust takes the simple average to obtain the upper and lower expected bounds. But the advantage of employing the Comps builder in infraMetrics® is that it allows the user to add greater weight on certain characteristics than others. In this case, If I was using this to work up an expected return for this investment and knowing the extensive capital expenditure program of Quickline, I would increase the weight of the investment characteristic. This flexibility, and the ability to incorporate data from the infraMetrics® database, allows investors to obtain meaningful estimates for the discount rate for infrastructure investments.