Yesterday’s $13bn bid for energy infrastructure provider APA by Hong Kong based CK Infrastructure (CKI) saw gains across the board for infrastructure stocks. In an otherwise down day on the ASX, Spark Infrastructure added 2.8%, Ausnet Services 1.0%, AGL 2.5% and toll road operator and owner Transurban 1.4%.
APA’s securities finished trading at $10.00, up 20.9% on Tuesday’s closing price of $8.27, but still a full dollar short of the indicative bid price of $11.00. The wide discount reflects the market saying that this bid is by no means a “done deal”.
And it is not just that the bid is indicative and conditional. It has the usual conditions around being subject to satisfactory due diligence, implementation through a scheme of arrangement and APA Directors indicating that they will support the offer and vote in favour.
The big condition relates to regulatory approvals from the Foreign Investment Review Board (FIRB) and the Australian Competition and Consumer Commission (ACCC).
APA is one pf Australia’s leading energy businesses, owning and/or operating in excess of $20 billion of energy infrastructure assets. Its 15,148km gas transmission pipelines span every state and territory on mainland Australia, delivering approximately half of the nation’s gas usage. It also distributes gas to 1.4m consumers through 28,600km of gas mains and pipelines, owns wind and solar farms producing 585MW of power, gas processing plants and 244km of high voltage electricity transmission.
CKI and its associated consortium partner Power Assets own a majority stake in SA Power Networks, the primary electricity distribution network in South Australia; Citipower, which supplies electricity to 310,000 customers in Melbourne's CBD and inner suburbs; and Powercor, Victoria's largest electricity distributor which supplies electricity to 700,000 regional, rural and outer Melbourne customers. It also owns Australian Gas Infrastructure Assets. The latter supplies gas to 2 million customers through 34,000km of mains and pipelines, and owns 3,500km of gas transmission pipelines.
The CKI consortium revealed that it had already had discussions with and provided information to both FIRB and the ACCC. In respect of the ACCC, it has proposed a divestment package which would include APA’s interests in the Goldfields Gas Pipeline, Parmelia Gas Pipeline, Mondarra Gas Storage Facility and a standalone management team.
Whether these divestments will be sufficient for the ACCC is hard to say, but clearly the market thinks that competition concerns are going to come to the fore. FIRB’s position is unclear, but with more and more energy infrastructure assets coming under foreign control, a recommendation to the Treasurer to block the takeover can’t be ruled out.
One aspect that can be ruled out is a competing offer. The bid price of $11.00 is full, representing a 33% premium to APA’s last traded price and a 26% premium to the broker consensus target price of $8.73. Further, this is a company that is sitting on $9.3bn of net debt in an environment of rising bond yields, geared at 67%, with limited revenue or earnings growth. The company has guided to EBITDA of $1,475m to $1,510m in FY18 compared to $1,470m in FY17. Best case, 2.7% growth.
A forecast distribution of 45c in FY18, largely unfranked, puts it on a yield of 4.1% based on an offer price of $11.00. Broker consensus, according to FN Arena, has the distribution rising by 3.5% to 46.6c in FY19, a prospective distribution yield of 4.2%.
Shareholders, particularly those who took part in a $500m capital raising just a few months’ ago at $7.70 per security, will be hoping that FIRB and the ACCC let the bid through. Those worried about the “national interest” might have a different view.
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