Hong Kong’s CK Infrastructure Holdings has made a AU$12.98 billion (US$9.8 billion) takeover offer for Australia’s biggest gas pipeline company, APA Group, offering a hefty 33% premium to tap into a tight gas market on June 13.
The deal would make CK Infrastructure, part of the business empire founded by Hong Kong tycoon Li Ka-shing, the major player in Australia’s east coast gas pipeline network. But it comes as soaring gas and power prices have caused political blowback, raising concerns it could run into competition and national security hurdles.
APA’s shares rose 21% to AU$10.00 (US$7.59), but closed well below the offer price of AU$11 (US$8.35) per stapled security, signaling investor uncertainty over whether Australia’s Foreign Investment Review Board (FIRB) and the Australian Competition and Consumer Commission would clear the deal.
CK Infrastructure, leading a consortium with CK Asset Holdings and Power Assets Holdings, said it was already talking to the regulators.
Since the controversial sale of the port of Darwin to a Chinese company in 2015, the government has been at pains to demonstrate limits to its ties to China, its biggest export partner, including blocking the sale of Australia’s biggest cattle station to Chinese interests.
The FIRB rejected bids by China’s State Grid and CK Infrastructure for the nation’s biggest electricity network Ausgrid in 2016 as that business served an Australian spy facility.
However, CK Infrastructure ran into no trouble last year with a AU$7.4 billion (US$5.6 billion) takeover of Australian pipelines and electricity network owner DUET Group, adding to the swathe of gas and power assets it already owns across Australia.
CKI’s offer for APA AU$11 per stapled security was well above APA’s last close of AU$8.27 and its record high of AU$9.90 hit a year ago.
“It’s a decent premium. What it basically shows is there is a disconnect between how the private market wants to value these assets and how the stock market values them,” said Jason Teh, chief investment officer at Vertium Asset Management, which does not own shares in APA.
APA said on June 13 it would evaluate the bid and agreed to open its books for the consortium to review. It told shareholders to take no action.
“Based on the indicative price of AU$11.00 cash per stapled security, the APA Board considers that it is in the best interests of APA’s security holders to engage further with the consortium,” APA said in a statement.
The CKI-led consortium welcomed APA’s decision to enter talks, saying the all-cash proposal provided a “compelling opportunity” for security holders to realize value.
APA’s biggest shareholder, UniSuper, which owns a 16.1% stake, did not comment on the offer price, but chief investment officer, John Pearce, said it fully supported allowing CKI to conduct due diligence.
The competition watchdog said on June 13 it would take about 12 weeks to review the deal after receiving more information.
APA dominates gas transportation on Australia’s east coast, where the southeastern states are increasingly dependent on supply from Queensland in the north, and where CK Infrastructure already owns a gas distribution network.
JPMorgan analysts said they doubted any rival bids would emerge but said Foreign Investment Review Board approval “may be challenging considering APA’s dominant position in gas pipelines on the east coast.”
Macquarie analysts, however, said plans by other companies to build LNG import terminals might ease concerns about lack of gas competition.
To avert competition concerns, CK Infrastructure has offered to divest all of APA’s pipeline assets in Western Australia, as it already owns the major Dampier to Bunbury gas pipeline in that state, acquired in its takeover of DUET.
Macquarie is advising APA, while Morgan Stanley (NYSE: MS) is advising the CK Infrastructure-led consortium. ($1 = 1.3208 Australian dollars)