CK Infrastructure’s bid for APA Group is now in full swing after being admitted to the data room and Australia’s competition watchdog kicking off its review of the AUD 13bn (USD 9.6bn) takeover this week.
The consortium led by Hong Kong-listed CKI started due diligence this week, Inframation understands, after the non-binding, AUD 11 cash per stapled security bid for APA was made public on 13 June.
Deal watchers are wondering which way watchdog, the Australian Competition and Consumer Commission (ACCC), and the Foreign Investment Review Board, will sway.
Some analysts think CKI has not a lot to worry about on the competition front, since it has already agreed to divest APA’s assets in Western Australia, where CKI already own pipelines.
CKI, which is owned by one of Asia’s richest men, bought rival pipeline operator DUET in 2017, which includes the Dampier to Bunbury pipeline in WA.
At the same time, analysts agree selling the owner-operator of Australia’s largest gas transmission network to foreign players is not going to be easy to get past the ACCC, the Foreign Investment Review Board nor the newly established Critical Infrastructure Centre that sits in the Turnbull government’s Home Affairs office.
Infrastructure funds canvassed by Inframation are hoping the ACCC – which has long sought to impose limits on APA’s dominant position – sees this as an opportunity to allow new owners of some of its pipeline assets in the far more populous east of the country, as well as in the west where CKI is proposing to divest APA’s pipelines.
The ACCC on Tuesday called for public submissions on the takeover, which will close on 13 July. The ACCC is due to make its final decision by 13 September.
Its investigation centres on whether the price of gas transmission, storage or distribution would be likely to increase, or service levels decrease; whether access to gas transmission services would be affected and how a takeover would affect competition around the construction of new pipelines, according to its request for submission released on Tuesday (June 26).
The regulator noted that it may impose changes to CKI’s proposal, whether the divestiture of WA assets would address competition concerns and asked for views on whether any other assets may need to be sold to operate the divested business.
The FIRB question
The APA takeover will be politicised and there is likely to be a public backlash on the monopolistic ownership of gas in Australia, as the recent controversy over gas prices showed, one analyst who follows APA Group said.
“However, I don’t see it getting the same scrutiny [from FIRB] as AusGrid did.”
Credit Suisse analysts concur. CKI’s pre-offer contact [with the ACCC] to hive off the Goldfields and Parmelia gas pipelines and Mondarra Gas Storage Facility in Western Australia and streamline its critical infrastructure suggests the offer will succeed.
“With ACCC divestments seemingly ironed out, FIRB approval shapes as the key stumbling block,” Credit Suisse researchers Richard Wilson and Chloe Lim wrote in a client report.
CKI’s and China major State Grid’s billion-dollar plays for New South Wales energy giant Ausgrid were both knocked back by federal Treasurer Scott Morrison who said it was “contrary to the national interest,” in 2016.
The AUD 13bn bid is a “big move” by CKI and although the takeover is “complicated”, the deal will likely get over the line, the APA analyst added.
He said CKI are paying a big premium, which highlights the “monopolistic aspect of what they are trying to do – take over a huge chunk of Australia’s pipeline infrastructure”.
But the fact CKI pre-empted competition issues with the ACCC by proposing to sell off assets, which will then mean not much overlap with its other assets, should ease primary concerns.
“CKI’s takeover of APA is not going to change the gas molecule flow from the ACCC’s point of view,” the analyst believes.
However, the electorate might not see it that way. “The average voter doesn’t understand why a gas rich country has shortages … It is all too easy to point the finger at the Chinese, even though its not their fault.”
The share market too is worrying the regulators will block the deal, despite it being in APA shareholders’ interest, the analyst noted. APA’s share price is trading below average in recent days – it is currently trading at AUD 9.91 at 4.10pm AEST on Wednesday (27 June) – which is not reflecting the AUD 11 per stapled security bid offer.
IFM Investors, Brookfield Asset Management and Canadian fund OMERs have been mentioned in media speculation as possible counterbidders. Macquarie Capital is acting as the main defence adviser to APA Group and is busy putting out the feelers for other bidders. JP Morgan has also been hired to seek out other bidders in North America specifically.
Morgan Stanley are advising the CKI consortium and it and other investment bankers are busy scanning the market for buyers of the WA assets.
One infrastructure analyst is highly doubtful another player will swoop in and outdo CKI’s bid – especially IFM. There’s a “low probability that an investor will come in above that [price] given how high it is.”
Fund manager IFM “doesn’t fit APA’s framework well, due to regulatory uncertainty it is facing in the next 5-10 years”.
On the prospect of a rival bid, Credit Suisse analysts also believe there are not many players who will outdo CKI’s AUD 13bn bid.
However, CKI also may have their own views [on the changing regulatory framework] which may be reflected in the AUD 13bn bid price, which marks a 13.8 times FY19 EBITDA, compared to the 10.6 times average of global utilities/energy infrastructure peers.
As the Credit Suisse analysts put it, a ”superior bid [is] not expected – CKI has track record of paying what others won’t in the local market.” The infrastructure giant has a track record of seeing value where others do not, which explains its “high price for a fallen monopoly”.
The ‘fallen monopoly’ refers to the rapidly changing regulatory landscape APA is facing with the advent of a new negotiate-arbitrate regime with pipeline customers, which gives the arbitrator increased power.
“While it is often said that some infrastructure owners take a longer term view of value, we would argue that the new rules dramatically reduce the economic life of APA’s assets,” Credit Suisse researchers note.
Despite the chatter, CKI has not been notified of any counter bid in play, a source familiar with the offer confirmed, although this does not mean there is not one ready to bite.
An infrastructure banker unconnected with CKI or APA takes a different view. He believed it would be very hard for a CKI bid to get through the regulators. The best bet would be for them to team up with Australian investors, but CKI usually don’t do that, he noted.
But if CKI’s bid is blocked on national security grounds, it would leave the door open for large, locally based, infrastructure funds to make another offer at a lower price, he added.