KKR’s $5bn bid for Spark a fair tilt, investors say

Spark has kept the door ajar for a higher takeover bid from KKR and superannuation player Ontario Teachers’ Pension Plan Board after knocking back two offers.

Spark says it would engage with the consortium looking to mount a $5bn takeover. Photographer: Ian Waldie/Bloomberg

KKR and its Canadian partner’s $5bn takeover offer for Spark Infrastructure is a reasonable tilt for the electricity infrastructure operator, according to investors, amid doubts over whether the duo will substantially raise their bid.

Spark has kept the door ajar for a higher takeover bid from KKR and superannuation player Ontario Teachers’ Pension Plan Board after knocking back two offers of $2.70 and $2.80 per security respectively.

Spark said it would engage with the consortium and provide limited information as part of constructive talks although that would not include due diligence.

Spark hosted the consortium for a briefing on Friday as part of its offer for “constructive talks” and top 10 Spark shareholder Argo Investments said it was a reasonable buyout price given the company’s middling share price performance in the last few years.

“From where Spark has been trading the last few years you‘d have to think it’s probably not a bad opening gambit,” Argo managing director Jason Beddow told The Weekend Australian.

“You always assume you’re never going to get the opening bid - but it’s probably a reasonable starting point. The 10c bump at least gets a conversation with them.”

The prospects of the consortium giving a big bump to their $5bn Spark Infrastructure takeover bid are low although the duo could boost capital funding and financial leverage beyond Spark‘s current limits should they prevail, analysts said.

The offer price already looks fair, JP Morgan said, warning investors not to chase the stock.

“There is no guarantee that the consortium will continue to engage, and in our view the likelihood of a substantially higher price is low,” JP Morgan analyst Mark Busuttil said.

“We would further highlight that given Spark has minority interests in its three largest assets, a transaction is likely financial only which could preclude many potential interlopers. Given consensus valuations prior to the announcement were 14 per cent below the offer price, we would not recommend chasing the stock.”

Spark chief executive Rick Francis said on Thursday it would consider further offers or rival bids amid speculation other parties may also be circling.

Spark owns stakes in $17bn of network assets across three states, including distribution in South Australia, western Victoria and the Melbourne CBD as well as NSW transmission business TransGrid.

Morgan Stanley said a successful bid could see a tweak to the electricity company‘s risk appetite.

The takeover offer “lead us to adjust our longer-term growth and return assumptions, and widen our bull and bear case scenario value range, reflecting that the bidding consortium may have longer time horizons, lower capital costs, and greater ability to raise financial leverage and growth capital funding vs Spark standalone,” Morgan Stanley analyst Rob Koh said.

Low global interest rates and cheap debt have investors and superannuation funds on a fresh hunt for infrastructure assets that can deliver steady returns over the long-term. The Spark bid underlines major interest by investors in gaining access to the broader infrastructure sector following a huge $22bn bid for Sydney Airport and a $8.8bn tilt for Boral by Kerry Stokes’ Seven Group.

KKR has previously linked up with Ontario to take a major stake in Finnish electricity company Caruna while the duo along with partner Queensland Investment Corp are in the race to buy a 70 per cent interest in Optus’s $2 billion Australian telecommunication tower portfolio.

Spark - chaired by Doug McTaggart - has top shareholders including Lazard Asset Management, Franklin Resources, Legg Mason Asset Management and Maple Brown-Abbott.

Spark shares were flat at $2.63 after jumping 6 per cent on Thursday and 8 per cent on Wednesday.