Probuild shock ‘to hit foreign investment’

Move sends a warning to all foreign investors looking to bid for Australian assets, say investment bankers.

The Ribbon at Darling Harbour in Sydney, designed by the Adelaide team of Hassells.

The federal government’s surprise move to block China State Construction’s $300m buyout of Australian-based builder Probuild on security grounds will send a warning to all foreign investors looking to bid for Australian assets, investment bankers have warned.

At the same time, increasing delays in securing official approval for deals could soon see foreign funds look elsewhere.

David Williams, the chairman of investment bank Kidder Williams who specialises in advising on deals in the agriculture and food industries, said foreign investors were waiting for at least six months to get deals reviewed by the Foreign Investment Review Board.

These delays put them at a competitive disadvantage with Australian bidders for any asset.

“The delays are adding to the uncertainty of foreign investors wanting to buy an Australian asset or contribute capital to an Australian asset in a competitive process,” he said.

He said he was now advising potential Chinese bidders not to bother going ahead with any bids for Australian companies as they would almost inevitably be rejected after a long review period of at least six months.

“The result (of the decision to reject the Chinese bid for Probuild) will affect not just Chinese bidders,” he said. “Foreign investors will not bid because the timetable can’t work in a competitive process.

“The uncertainties it throws up for sellers are so great they don’t want to wait around (to see if the foreign deal gets approval).”

His comments came as Probuild, which has been caught in the crossfire of a political tussle, was on Wednesday awarded new contracts to take over the $730m development of one of Sydney’s landmark construction sites as well as Grocon’s $100m-plus Northumberland office project in inner Melbourne for the Liberman family.

The South African-owned Probuild is about to begin work on the partially completed 25-level The Ribbon hotel development in Darling Harbour, taking over from collapsed construction giant Grocon, which sold the construction and development rights to Chinese-based owner Greaton in February last year.

Completion of the 143-suite, five-star W Hotel building on the edge of the Sydney CBD is still expected by the second quarter of next year, despite delays.

The Property Council of Australia said the industry would be closely reviewing the Probuild decision for its longer term implications for foreign investment in the building industry.

“FIRB has a valid and important role in assessing security issues associated with foreign investment,” said Ken Morrison, the CEO of the Property Council

“We’re not in a position to second guess its decisions.

“Industry operators have been closely watching the evolving foreign investment framework over recent months and have been factoring in the more stringent thresholds, increased costs, and longer time frames for FIRB decisions. There’s no doubt the industry will be looking closely at this latest decision and reflecting on its consequences for future investment and transaction proposals.”

Kidder Williams’ Mr Williams said the effective removal of Chinese bidders from the sale process of assets and companies in Australia would take at least 10 per cent off the prices paid to Australian sellers.

Chinese company Mengniu was prepared to pay $600m for Lion’s drinks business, which was later sold to Bega for only $534m.

Mr Williams said foreign bidders did not want to spend six months going through the FIRB approval process with the outcome still uncertain at the end.

Lengthy processes

He said the Treasurer’s decision to block the Chinese company from buying Probuild was just another example of the lengthy processes foreign investors had to go through to invest in Australia.

Treasurer Josh Frydenberg has declined to comment on the decision.

Probuild is involved in construction of the Melbourne headquarters for CSL. It has also been involved in the construction of Victoria Police’s new Melbourne headquarters.

Mr Williams said he was advising Chinese companies considering buying Australian assets to look at doing supply deals with the companies instead and take minority holdings which fell below FIRB review thresholds.

He said there should be a “gold pass” system for foreign investors which had already been approved by FIRB to buy assets in Australia.

“If people are serial investors in Australia and have proved themselves to be good corporate citizens, they should be able to get a gold pass deal which gives them more certainty about being able to buy more assets in Australia.”

China’s Foreign Ministry hit out at the Probuild decision, describing it as “politicising trade and investment issues, violating market principles and the spirit of the China-Australia free trade agreement, and imposing discriminatory measures on Chinese companies”.

“Such actions have disrupted the sound momentum in practical co-operation between China and Australia and hurt the image and reputation of Australia itself,” a spokesman said.

“China-Australia trade and investment co-operation is mutually beneficial.

“The Chinese government always asks Chinese companies to abide by international rules and host country laws and regulations when conducting international co-operation.

“It is a mistake to politicise normal commercial co-operation and seek political interference in the name of national security.”

The move comes as stricter new laws on foreign investment in Australia came into force on January 1. Under the rules any bids for companies, land or assets in any way linked to national security need to go to FIRB for approval.

The law provides for a “claw back” of foreign investment deals which have gone ahead for what the federal government later deems to be critical assets.

In a recent interview with The Australian, law firm Gilbert + Tobin partner Deborah Johns said foreign investors were concerned at the impact of stricter foreign investment laws on assets deemed to be critical for national security.

Sensitive assets

While the laws have removed the Covid-era need for all investments by foreigners to be scrutinised by the FIRB introduced last March, they brought in stricter scrutiny of deals on national security grounds.

Ms Johns, a corporate advisory and foreign investment specialist at Gilbert +Tobin, said foreign investors were pleased to see the end of laws introduced in March which meant every investment in Australia by foreign companies had to be approved by FIRB. But she said there was concern about how the new law would apply to foreign investors looking to bid for what were deemed to be sensitive assets.

“The big concern for people is the definition of sensitive assets,” she said,

She said this would be tied to a review of the Critical Infrastructure Act which is expected to expand the definition of what assets are defined as critical infrastructure. Under the new legislation foreign takeover bids for anything deemed to be a sensitive asset will need to be scrutinised by FIRB regardless of value.

Ms Johns said it was expected that this would initially apply to a narrow definition of assets but could be expanded during the year in the light of an expansion of assets listed under the Critical Infrastructure Act expected in separate legislation.

At the moment, critical infrastructure assets are deemed to include electricity, ports, water and telecommunications.

Ms Johns said the definition could be expanded to include broader industries such as banking, food and groceries, supply chain logistics, data centres and other businesses which stored critical data.