Morningstar | Treasurer Blocks APA Takeover; No Change to Our View. See Updated Analyst Note from 07 Nov 2018
Treasurer Josh Frydenberg has given notice he intends to block Cheung Kong Infrastructure's, or CKI's, bid for APA Group. We expected this. The only surprise is the Foreign Investment Review Board, or FIRB, was unable to reach a unanimous decision. But that doesn't matter, it's the Treasurer's decision that counts.We maintain our AUD 8.30 fair value estimate. The share price has fallen sharply after the Treasurer's announcement, and the stock is now considered fairly valued. At the current price of AUD 8.70, it offers a mostly unfranked 5.3% distribution yield, with modest growth potential.
We think a combination of factors forced the treasurer's hand. First, APA owns strategically important assets, being Australia's core gas transmission network transporting gas between multiple gas fields and cities. Second, ownership of Australia's transmission pipelines is highly concentrated in just a few hands, with APA the largest and Jemena--half owned by a Chinese state-owned-enterprise--another major player. Had the acquisition been approved, it would have resulted in the vast majority of Australia's long-distance gas pipelines falling into foreign hands. Additionally, Cheung Kong owns controlling stakes in numerous intercity gas and electricity distribution networks, so its influence over Australia's energy security is already substantial.
APA's long-life assets and defensive revenue would appeal to many large investors. Perhaps another bid will emerge now APA has shown it’s a willing target. For instance, it should appeal to Australian super funds, which no longer need to be too worried about being outbid by foreigners with deep pockets thanks to the Treasurer.
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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