EUR 850.00 For Business Accounts Only

Morningstar | CKI's Bid for APA Group Is Unlikely to Succeed

After further consideration, we now believe the Foreign Investment Review Board, or FIRB, is unlikely to approve the takeover of narrow-moat-rated APA Group by Hong-Kong-based Cheung Kong Infrastructure, or CKI. If the acquisition was allowed, the vast majority of Australia's gas transmission network would be owned by two essentially Chinese firms. This concentration of ownership should make FIRB nervous, despite not wanting to appear averse to foreign investment. Additionally, selling important assets to foreigners would likely upset voters and further weaken the government's standing in the lead up to the Federal election.

As such, we remove the bid premium in our fair value estimate and revert to our underlying DCF-based valuation of AUD 8.30 per security. At the current price of AUD 9.78, the stock is overvalued. If we're wrong and the AUD 11 acquisition proceeds, upside is 13%. However, if the bid is blocked, which we now think likely, APA's security price is likely to fall 15% towards our fair value estimate. We believe the best option is to sell on market near current prices.

CKI already owns majority stakes in gas and electricity networks in Victoria, South Australia and Western Australia. Add in APA's unparalleled gas transmission network, and CKI's influence over Australia's energy security would be substantial. While the firm is publicly listed and has a good track record in Australia, we believe CKI would not be immune should the Chinese government pressure it.

We also note that State Grid, a Chinese state-owned enterprise, is a significant owner of gas transmission pipelines in Australia through Jemena, a joint venture with Singapore Power. Should the APA Group acquisition be allowed, the vast majority of Australia's gas transmission pipelines would be owned by two essentially Chinese firms--CKI and Jemena.