By Nichola Saminather May 12 (Bloomberg) -- Transurban Group, which owns toll roads in Australia and the U.S., rejected a sweetened A$7.2 billion ($6.4 billion) takeover bid from its three biggest shareholders, saying the offer undervalued the company. Australian fund manager CP2 Ltd., the Canadian Pension Plan Investment Board and the Ontario Teachers’ Pension Plan offered A$5.57 a share, 14 percent more than Transurban’s last traded price. That came six months after the Melbourne-based company rejected a A$5.25-a-share offer from the Canadian funds. “We believe Transurban, on a standalone basis, is worth more than A$6 a security,” said Andrew Chambers, an infrastructure analyst at Melbourne-based Austock Group Ltd., who has a “buy” rating on the stock. “There’s still a reasonable gap between what Transurban is worth and what the Canadians are offering.” The three funds, which already own a combined 42.4 percent of the company, are vying for control of assets including the Pocahontas 895 in Virginia and four Sydney toll roads to deliver steady earnings to their members. Transurban said it plans to go ahead with a A$542.3 million share sale to help fund its acquisition of the Sydney Lane Cove Tunnel. Shares of Transurban were halted from trading in Sydney as the company arranges the equity sale at A$4.60 apiece. Transurban is “very happy with the response of our institutional shareholders” to the equity raising, which closed at 11 a.m., spokeswoman Megan Fletcher said in a telephone interview today. The company has said it will announce the result of the equity raising tomorrow. If the funds don’t take part in the sale, their stakes will be diluted, meaning they may have to offer more in any subsequent bid. Next Steps The offer was an “inadequate price for control of Transurban given its performance and prospects,” the company said in a statement to the Australian stock exchange today. The requirement that it abandon its plan to sell shares was also a “defeating condition,” it said. The funds may respond by taking an offer directly to shareholders after Transurban completes the equity raising, said Angus Gluskie, who oversees $300 million at White Funds Management Pty in Sydney. “The execution of the rights issue by Transurban doesn’t preclude the bid going further,” Gluskie said. “If the stock price languishes after Transurban’s rejection, it would be a fertile environment for the bidders to put an offer to shareholders.” With the company’s last trading price at A$4.89, and likely to fall more when it resumes trading, the funds are unlikely to sell their stakes in Transurban following the rejection, he said. Lane Cove Tunnel The company said on May 10 it will buy the Lane Cove Tunnel for A$630.5 million. The 3.6 kilometer tunnel, which runs across Sydney’s northern suburbs, was placed in administration in January after low traffic numbers suggested its earnings would struggle to cover liabilities. Transurban’s equity raising will contribute to the tunnel’s acquisition, as well as funding work on the Hills M2 and M5 networks, two of its four toll-road assets in Sydney, it said. Transurban bought Hills Motorway Group for A$2.07 billion in April 2005, giving it control of Sydney’s M2 toll road. In December 2006 it agreed to buy Sydney Roads Group, which operated three highways in Australia’s most populous city, for as much as A$1.26 billion in stock, in what was a 16 percent premium to the previous closing share price. Ontario Teachers’ held C$96.4 billion ($94.5 billion) in net assets, according to its website, while Canada Pension has C$123.9 billion. Canada Pension spent A$1.64 billion in June to buy Macquarie Communications Infrastructure Group, an investor in radio transmission towers, after raising its initial offer by 20 percent to win shareholder approval. To contact the reporter on this story: Nichola Saminather in Sydney at nsaminather1@bloomberg.net

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