CKI's bid for APA unlikely to succeed: Morningstar
Morningstar says a $13 billion takeover bid by Hong Kong infrastructure giant CKI for Australian energy company APA Group is unlikely to succeed because of regulatory hurdles.
Morningstar says a $13 billion takeover bid by Hong Kong infrastructure giant CKI for Australian energy company APA Group (ASX: APA) is unlikely to succeed because of regulatory hurdles.
In a note issued on Friday, Morningstar equity analyst Adrian Atkins said concentration risk would make the FIRB uneasy.
“After further consideration, we now believe the Foreign Investment Review Board is unlikely to approve the takeover of narrow-moat-rated APA Group by Hong-Kong-based Cheung Kong Infrastructure, or CKI,” Atkins says.
“If the acquisition was allowed, the vast majority of Australia's gas transmission pipelines would be owned by two essentially Chinese firms – CKI and Jemena.
"This concentration of ownership should make FIRB nervous, despite not wanting to appear averse to foreign investment."
Atkins adds there could political element to the decision, as "selling important assets to foreigners would likely upset voters and further weaken the government's standing in the lead-up to the Federal election."
CKI owns majority stakes in gas and electricity networks in Victoria, South Australia and Western Australia. If APA's unparalleled gas transmission network is added, CKI's influence over Australia's energy security would be "substantial", Atkins says.
As such, Atkins has removed the bid premium in Morningstar’s fair value estimate and reverted to an underlying discounted-cash-flow-based valuation of $8.30 per security. At the current price of $9.78, the stock is overvalued.
If the bid is blocked, Morningstar says APA's share price is likely to fall 15 per cent towards its fair value estimate.
"We believe the best option is to sell on market near current prices," Atkins says.
Earlier this month, APA Group committed to accepting a binding takeover offer from Cheung Kong Infrastructure, in line with its indicative offer from June of $11 per security in cash.
Group directors unanimously recommend the offer, and the independent expert, Grant Samuel, is bound to recommend it as well, Atkins says.
The Australian Competition & Consumer Commission will provide its view on competition concerns in mid-September, which according to Atkins, might require CKI to sell a few small assets and make other minor concessions. The FIRB's decision will come after the ACCC's decision.
APA Group security holders will vote on the takeover at a scheme meeting in late November 2018.
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Emma Rapaport is a reporter for Morningstar, based in Sydney.
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