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CKI's bid for APA unlikely to succeed: Morningstar

Emma Rapaport  |  11 Sep 2018Text size  Decrease  Increase  |  
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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.

Pipeline APA Group CKI Takeover

 

“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.

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

is a reporter for Morningstar.com.au

© 2019 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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