Macquarie Infrastructure: Liquidation, Possible Forced Selling Later

[I bought a little of this, did more work on it and its a little tighter than I'd normally like but wanted to post on it in case I'm missing something or others see more value here, and there's potential for some forced selling down the road]

Macquarie Infrastructure Corp (MIC) is the rare externally managed vehicle that is in the process of liquidating, but only after it was clear the incentive fee was well out of reach.  MIC is essentially a publicly traded private equity fund that invested in infrastructure or infrastructure-like businesses with the external manager charging a base management fee plus a carry.  They initially announced strategic alternatives in October 2019, with the first major asset sale (International-Matex Tank Terminals) closing in December and the resulting first special dividend being paid out in January.  From recent management commentary, it appears the liquidation is moving along quickly and we'll likely see transaction announcements in the coming months for the two remaining businesses, Atlantic Aviation and MIC Hawaii (dba as Hawaii Gas).  I think the gross upside is around 17%, with the IRR being a bit better considering most of the value should be returned to shareholders around year end.

Atlantic Aviation is a provider of fixed based operations ("FBO") for the general aviation ("GA") market, which basically means they provide jet fuel, hangar space and other services for private aircrafts at 69 airports throughout the United States.  This business is firmly in the "infrastructure-like" category, it is heavily reliant on the amount of GA traffic through the airports where it operates.  Atlantic experienced a quick but relatively brief covid downturn as private flights have rebounded much quicker than commercial flights.  Atlantic is one of the larger players in FBO industry, behind Signature Aviation (SIG in London), Signature recently agreed to a go-private transaction, after multiple bidders made offers, valued at 16x 2019 EBITDA.  In 2019, Atlantic did $276MM in EBITDA, but with corporate costs fully allocated, its probably more like $260MM on a standalone basis, at a similar 16x multiple the total value would be $4.16B, and after subtracting out $1B in debt at Atlantic, the sale would net $3.4B to MIC shareholders or $36/share (this is before Macquarie's incentive fees, etc.), above where the stock is trading today at ~$34/share.

MIC Hawaii, which operates as Hawaii Gas, is the state's only regulated natural gas distributor.  Natural gas makes up a small portion of the state's energy needs, their client base is more heavily concentrated in the restaurant and hospitality industry, both which suffered during covid from strict local lockdowns and travel restrictions.  Recently, travel to Hawaii has restarted from the US mainland, still limited from Japan and other parts of Asia, but trending in the right direction.  Prior to covid, Hawaii Gas was a very steady but no-growth business of about $60MM in annual EBITDA, converting to $40MM in FCF.  I don't have a great sense of what this business is worth, there's no perfect comp, but this is a stable business once the Hawaiian economy returns to somewhat normal, let's says its worth 8x EBITDA, or $480MM, subtract out the $94MM term loan on the business and its $4.40/share in value.

Proforma cash is approximately $250MM, which accounts for the remaining convertible senior notes that the company is actively retiring in the market.  Now Macquarie isn't liquidating the company simply because it is the right thing to do, they are getting a huge fee per the Disposition Agreement, which was intended to convert a termination fee into an incentive fee for maximizing value in a liquidation.  Above about $4.6B in total net proceeds, Macquarie earns a 6.1% share in cumulative payments on the entire net proceeds, it appears they'll likely meet that threshold and thus on my math, Macquarie would earn approximately $378MM (only somewhat confident that's directionally right), $28MM of which has already been paid as part of the IMTT disposition.  The net effect is approximately a net -$100MM cash position or -$1.15/share (leaving out any interim free cash flow generated by AA or Hawaii Gas), add it all up and its a little over $39/share in total value.

As always with a liquidation, the timing of the payments and the order of events is important.  To this point, the company will be converting to an LLC (a partnership for U.S. tax purposes) just prior to the closing of an Atlantic Aviation sale.  In a perfect world, MIC Hawaii would be sold first, its about 1/10th the size of Atlantic, any capital gains would be relatively trivial to the overall value of the company, but because MIC Hawaii is regulated, it may take over a year to secure approvals and close the deal.  I don't want to understate this risk, several years ago I owned the state's electric utility, Hawaiian Electric Industries (HE), which at the time had a deal with NextEra Energy (NEE) to buy HE and spinoff their bank subsidiary.  The regulators ultimately killed that deal, I forget the technical reasons, but it was largely local pride and not wanting to give up control to a larger mainland entity.  Less risk of that here with natural gas being a low-single digit piece of the energy grid, but still something to keep in mind as the liquidation unfolds, a dragged out process will turn a somewhat attractive IRR to a pedestrian one pretty quickly.  MIC will first sell AA (likely this year, with a close and special dividend in 2021), convert to a partnership so any capital gains would be at the individual shareholder level and then the sale of MIC Hawaii would be structured as a sale of the partnership units and wouldn't have any associated tax consequences.

Often with liquidations, there is an opportunity around the big bulky distribution, either just before or just after the payment, I could see a scenario where that effect is magnified here with the company also converting to a partnership and those remaining investors that can't own partnerships by their mandates or because its held in a tax deferred account, might be forced to sell, creating an opportunity for those willing to go through the tax and paperwork headaches of a partnership.  Something to keep on the watchlist even if the current spread isn't particularly appealing by my estimation.

Disclosure: I own shares of MIC