Morningstar | APA Accepts Unchanged CKI Bid; But FIRB Might Not Be So Willing
Narrow-moat APA Group agreed to a formal, binding takeover offer from Cheung Kong Infrastructure, in line with its indicative offer from June of AUD 11 per security in cash. APA Group directors unanimously recommend the offer, and the independent expert, Grant Samuel, is bound to recommend it as well. The main risk to the deal falling over, and it is a major risk, remains objection from the Foreign Investment Review Board, or FIRB. We continue to rate this a 50% chance. Should the takeover succeed, upside is around 10% from the current share price. Should it fail, we think APA Group's security price could fall around 20% towards our standalone DCF-based valuation of AUD 8 per share. Our current fair value estimate of AUD 9.50 is set at the midpoint of our standalone valuation and the takeover offer price, reflecting our view that the deal has a 50% chance of succeeding.Should FIRB block the takeover to stop APA Group's strategically important gas transmission grid falling into foreign hands, there's still a reasonable chance of APA Group being taken over as Australian pension funds could come out of the woodwork. Nonetheless, conservative investors might want to sell on market to lock in gains. There are plenty of other solid income stocks trading around fair value, including AusNet Services, Spark Infrastructure, AGL Energy, and Transurban.
APA Group security holders will vote on the takeover at a scheme meeting in late November 2018, if all goes to plan. We'll provide a recommendation on how to vote closer to the meeting, though we're highly likely to recommend the generous offer. Break fees of up to AUD 130 million apply in certain circumstances.
In addition to the AUD 11 per security offer, APA Group investors are entitled to a AUD 24 cent per security, or cps, final fiscal 2018 distribution and, if the takeover is delayed, AUD 4 cps for every month past Dec. 31, 2018 it drags on. The end date for approval of the schemes is March 31, 2019.
APA Group's principal activities are the ownership and operation of energy infrastructure assets and businesses, including energy infrastructure, primarily gas transmission businesses located across Australia; asset management and operations services for the majority of Co.'s energy investments and for third parties; and energy investments in listed and unlisted entities. Co. comprises the following reportable segments: Energy Infrastructure, Asset Management, and Energy Investments.
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