Aus & NZ: CKI in USD 9.9bn bid for pipeline giant APA

13 June 2018 - 12:00 am UTC

A consortium led by Hong Kong-listed CK Infrastructure (CKI) has lobbed an AUD 13bn (USD 9.88bn) bid for Australian pipeline giant APA Group.

The consortium has already proposed to sell off APA’s interests in a number of pipeline assets in Western Australia if its bid is successful, to assuage competition concerns.

The unsolicited proposal offers AUD 11 cash per stapled security for 100% of the owner-operator of Australia’s largest gas transmission network, according to an APA statement on Wednesday (13 June).

The offer marks a 33% premium on APA’s opening share price the same day on the Australian Securities Exchange (ASX). APA said it received the offer earlier this week.

In a joint disclosure, Hong Kong-listed CKI, CK Asset Holdings and Power Assets Holdings confirmed that they have made a non-binding proposal and said that the deal may be undertaken by CK Asset alone.

APA’s board, chaired by former AGL Energy head Michael Fraser, has agreed to allow the consortium to undertake due diligence “on a non-exclusive basis”.

This leaves the door open for counter offers from other interested parties, who may be eyeing APA’s enviable portfolio of assets, a source familiar with the matter said.

It is too early to say when the bidder will finish its examination of APA Group’s data room, the source added.

The offer was lobbed when APA’s shares were trading at the lower end of its range in the past three years of between about AUD 7.50 and AUD 9.50. The depressed share price has followed a big change to the way gas pipelines are managed in Australia, with the recent introduction of a new negotiate-arbitrate regime with pipeline customers. 

APA virtually has a monopoly over gas pipelines on the east coast of Australia, but this regime shift places some uncertainty over APA’s future as it lessens its power to negotiate and gives the arbitrator a “whole new number of powers”, one analyst who covers APA told Inframation. CKI may feel it can deal with this regime better or may be indifferent about the change, he added.

Asset sales
The CKI-led consortium has already been in contact with the Foreign Investment Review Board (FIRB) and the Australian Competition and Consumer Commission (ACCC).

It proposed to sell off APA’s interests in the Goldfields Gas Pipeline; Parmelia Gas Pipeline; and Mondarra Gas Storage Facility to alleviate any competition concerns. These are located in Western Australia, where consortium members already own pipeline assets.

These are likely to have ready buyers. As a run of big privatisations come to a close in Australia, infrastructure investors have been eyeing assets owned by companies, including APA’s pipelines, for some time.  

APA’s dominant pipeline network also includes:

– Yamarna Gas Pipeline in Western Australia’s Eastern Goldfields;

– Queensland Curtis LNG pipeline which connects coal seam gas fields in the Surat Basin to BG Group’s LNG export facility in Curtis Island;

– Moomba to Adelaide Pipeline System;

– the 110MW Darling Downs solar farm in Queensland;

– interests in gas storage facilities and gas-fired power stations.

CKI is no stranger to FIRB. Treasurer Scott Morrison – who has the ultimate say on takeover bids – raised eyebrows when he blocked CKI’s and State Grid Corporation’s takeover bids for a majority stake in New South Wales energy giant Ausgrid.

Following this rebuttal, a CKI-led consortium made a successful play for Australian utility owner DUET Group – a rival of APA Group – paying out AUD 7.4bn. It was forced to wait six months for FIRB approval of this deal.

CK Infrastructure and CK Asset each now own 40% stakes in DUET, while Power Assets Holdings owns 20%.

However, “that doesn’t mean it will approve the next one,” the analyst noted, given the extent of APA’s pipeline network.

Since CKI bought Duet, a new regime has been introduced under the Department of Home Affairs’ Critical Infrastructure Centre that combines the efforts of FIRB and numerous other departments including defence and security agencies, as well as the ACCC and tax department, to closely examine any foreign takeover of assets deemed critical national infrastructure. 

The analyst said the possible takeover is bound to raise energy security concerns as it would mean CKI owns “the infrastructure carrying every electron and molecule of gas between Tasmania and Queensland”.  

Foreign takeover barriers aside, there are several other obstacles to overcome before any deal would be finalised.

After completing due diligence, the consortium would have to make binding offer, which would then have to be approved or rejected by the APA board and subsequently recommended to shareholders. If accepted by shareholders, a court would assess the scheme of arrangement which could take several months to implement.

The CKI-led consortium has pledged to employ a standalone management team, following any takeover.

CKI is already a major player in Australia’s energy business. It holds a 51% stake in ETSA Utilities, the primary electricity distributor of the state of South Australia. It also owns 51% of CHEDHA Holdings, the holding company of CitiPower and Powercor plus a stake in ASX-listed Spark Infrastructure. Additionally, it owns a strategic interest in one of Australia’s largest natural gas distribution companies, Envestra.

AGL deal 
The CKI bid comes after APA inked an agreement to build pipelines for AGL’s proposed Crib Point floating gas import terminal in Victoria on Monday. 
The deal is part of AGL’s negotiating strategy to put pressure on other domestic producers, the analyst said. If the terminal does go ahead, it will open up competition providing AGL with the ability to deliver a new source of gas supply to Australia’s southern states to alleviate pressures in the tight domestic market in eastern Australia. 
Australia’s east coast markets currently consumes 650 petajoles of gas annually compared to 14,000pj exported to offshore markets. APA proposed pipeline would transport 500 terajoles a day.