Banks face $50m hit from Ausgrid foreign interest ruling

Ausgrid

At least four of Australia’s top investment banks are at risk of losing an estimated $50 million in fees on the back of the federal government’s move yesterday to block the $10 billion-plus NSW government electricity asset selldown to the two foreign bidders in the final stages of the contest.

Yesterday, Treasurer Scott Morrison said proposals by the Chinese government-owned State Grid and the Hong Kong-based Cheung Kong Infrastructure to buy a 50.4 per cent interest in the state’s electricity network Ausgrid were “contrary to the national interest”.

Bids were said to be well over $10bn for the 99-year lease of the asset, with the large equity cheque destined for use to finance major state infrastructure projects such as Sydney’s WestConnex.

But with the deal largely scuppered by the Turnbull government yesterday, any relaunched auction is expected to reap proceeds far less than $10bn.

And now some question whether the sale of the Ausgrid stake will still go ahead.

If that is the case, it will probably result in a wave of despondency across the investment banks involved after they were positioned to pocket millions of dollars in proceeds from the transaction.

In last year’s auction involving the state’s TransGrid business, the financial rewards for the advisers to the successful Spark Infrastructure-backed consortium, Royal Bank of Canada and JPMorgan, were said to be about $20m, about $5m of which may have gone to each of the two investment banks on the deal.

Deutsche and UBS, which have been aiding the NSW government, have so far drawn from a pool of about $20m collectively in government fees for the earlier sale of TransGrid, according to estimates, while those on offer for Ausgrid are said to be about half that.

Chinese suitors are understood to offer less generous reward packages than local participants, yet many still estimate that those working for the Chinese state-owned entity — Macquarie Capital and HSBC — would have walked away with about $20m in total. It would be a similar case for Credit Suisse working with CKI. The latest sale of Ausgrid through Deutsche and UBS, which came down to a two-horse race between the Chinese, reached a climax in recent weeks, with the decision of the successful buyer expected around the end of this month.

But the shift in the balance of power following the federal election towards politicians against foreign investment had created a strong level of doubt as to whether a sale to one of the final Chinese bidders would be successful.

Once State Grid entered the competition, local contenders bowed out, knowing they would be unable to compete with the Chinese powerhouse’s cost of capital.

In the race for TransGrid last year, State Grid was able to bid the same price as the successful consortium including Spark Infrastructure and Hastings Funds Management, but was hobbled by its local partner, Macquarie Infrastructure and Real Assets.

State Grid needed to compete alongside MIRA to appease the federal government with respect to foreign investment requirements.

This time around, State Grid would have only been able to buy less than half of the electricity distributor before the Foreign Investment Review Board reversed its stance, later indicating that a bid for all of the 50.4 per cent interest by a foreign group would be permitted, as revealed by this column in January.

Two of the options for the state government now are to relaunch the sales process in the hope of selling the 50.4 per cent interest to other parties that would satisfy the government’s foreign investment requirements or listing part of the business on the Australian Securities Exchange.

However, a deal involving a listing has been played down as unlikely to happen, given there is unlikely to be enough institutional and retail equity demand to lock in a float worth as much as $10bn.

Some also question whether new advisers will be appointed to replace Deutsche and UBS, though others played this possibility down as highly unlikely. A revised auction is likely to see Australian groups such as Queensland Investment Corporation, Australian Super and potentially Hastings Funds Management and Spark Infrastructure enter the contest.

However, it will be interesting to see whether major global
funds from elsewhere would satisfy the government’s requirements.

It will also be interesting to note the effect this will have on Downer EDI, which paid up in recent years for the services business Tenix in the hope of securing lucrative contracts
from electricity privatisation programs.