$10bn AusNet bid a tough ask for APA: analysts

APA chief executive Rob Wheals. Picture: John Feder

APA Group would likely have to tap the market for about $3bn to win the $9bn electricity transmission company AusNet, according to some in the market.

This is based on the $10.5bn pipeline company’s current share price, which fell almost 5 per cent on Tuesday on news that it had put forward a $10bn cash and scrip proposal to buy AusNet, the owner of the Victoria electricity transmission network and $4.9bn of electricity and gas distribution networks in Victoria.

Market analysts say the transaction for APA would lessen the returns of the overall company.

While APA said in a statement it was planning to raise about $1.5bn to fund the transaction, the thinking among some is that with the share price now trading lower, it may have to raise almost double that amount to beat Brookfield, given a falling share price reduces its overall price.

Another major challenge for APA is likely to be gaining approval from the Australian Competition and Consumer Commission, which is increasingly taking a harder line on major mergers.

APA owns more gas infrastructure assets across Australia than any other group and the competition watchdog is likely to be unhappy about gas asset ownership concentration in Victoria.

The company announced on Tuesday that it had been in talks to buy AusNet, which has about $11bn of assets, and had made an offer valued at $2.60 per share, based on APA’s Monday closing share price of $8.88.

It came after AusNet announced on Monday it had agreed to provide Brookfield exclusive due diligence, which is for eight weeks, after the Canadian private equity firm put forward a $2.50 per share cash offer.

APA has been trying to find acquisitions in the US as it remains keen to increase its scale.

The latest mooted deal comes after DataRoom revealed last month that APA had been working on a major transaction with help from Goldman Sachs, Macquarie Capital and JPMorgan, with plans for an equity raising of about $2bn.

The three banks are aiding APA with its attempts to buy AusNet, along with advisory firm Aquasia.

APA indicated in a statement on Tuesday that it first approached AusNet to buy the business on September 1 with a $2.32 per share offer and engaged on September 16, indicating an intention to make a revised proposal.

It also spoke to major shareholders Singapore Power, which owns 32.3 per cent and signalled it was supportive of negotiations, and had also engaged with 19.9 per cent shareholder, China’s State Grid.

One view is both would be keen to exit, with the Foreign Investment Review Board unlikely to allow them any further expansion opportunities.

APA argues that its offer, comprising $1.82 of cash and 0.0878 APA securities, is not dependent on FIRB approval, would create synergies, would be only subject to four weeks of due diligence and would create a combined business with $29bn of assets.

Shares in AusNet, advised by Citi, closed at $2.59, with its market value at about $9bn while APA shares closed at $8.46.

Other major infrastructure deals also rely on regulatory approval and are not yet considered a slam-dunk.

An IFM-led consortium’s $23.6bn bid for Sydney Airport still relies on FIRB approval, given consortium member GIP is US-based, and it also needs clearance from the ACCC.

IFM-controlled funds would overshoot the 15 per cent cap on ownership of Sydney and Melbourne airports, with the Sydney Airport buy, but the IFM consortium argues it would be permissible because the ownership would be through separate funds of IFM partners.

It will also be interesting to follow how the auction of AustralianSuper’s 16 per cent stake in Ausgrid plays out, given that a sale could lead to greater concentration of ownership of Australian electricity assets, what with more electricity assets set to be placed on to the market by the NSW government in the future.

This could be a situation also closely watched by the ACCC, with Brookfield, Macquarie and Ontario Teachers Pension Plan all bidders.

Ontario and its backers have just agreed to buy Spark Infrastructure, which owns minority stakes in South Australia and Victoria electricity distribution assets as well as a stake in NSW electricity transmission business TransGrid, while Macquarie Infrastructure and Real Assets is already an owner of NSW electricity distribution business Endeavour Energy.