A consortium led by Hong Kong-based CK Infrastructure (CKI) has made a non-binding offer for APA Group. The key details of the proposed transaction are as follows:
The offer price of $11 per security, or around $13bn, represents a 33% premium to the last closing price before the offer of $8.27 on Tuesday, 12 June.
The proposal is subject to due diligence (which APA has granted), management approval and regulatory approvals.
CKI has had discussions with the Foreign Investment Review Board (FIRB) and the Australian Competition and Consumer Commission, and has proposed a divestment package of APA’s Western Australian assets.
We estimate CKI’s offer implies a 5.7% weighted average cost of capital, which likely precludes any counter bid. Assuming the final dividend is paid to security holders, we estimate the stock price is implying a 58% likelihood of the offer being concluded. Should CKI successfully acquire APA by November, we calculate buying the stock now would yield a return of 12.5% over five months, or 30% annualised.
In an election year, with a continued focus on east coast gas prices, we see FIRB and federal government approval as the biggest challenge. CKI already has interests in a number of Australian energy assets, including the former Envestra assets, SA Power Networks, CitiPower and Powercor, as well as the recently acquired DUET assets. CKI was also part of an unsuccessful bid for Transgrid, and was prevented from buying Ausgrid by the FIRB in 2016.
We have raised our target price to the indicative offer price of $11.00 from $9.55, implying a potential 12–15% return over five months (based on similar transactions, we expect FIRB and government processes to take four to five months). Our recommendation has been downgraded to Hold from Buy, however, based on our view that winning regulatory approval for the transaction will be a key hurdle.