Australian foreign ownership rules face first $ 7 billion AusNet test


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SYDNEY – The fight over ownership of Australia’s huge power grid is taking shape as a test of the country’s attitude towards foreign investment in critical infrastructure, months after Canberra tightened approval rules for overseas owners.

AusNet Services, which owns and operates the electricity transmission network and gas and electricity distribution assets in Victoria’s second most populous state, is at the center of competition between Canadian investment firm Brookfield and Australia’s largest pipeline operator, APA Group.

Brookfield is already considered a favored bidder after initially securing an exclusive right to in-depth verification, after making a total cash offer of A $ 9.6 billion ($ 7.3 billion).

This is the first time since the introduction of the new rules that the majority share in the perceived “sensitive” assets is sold, and the participation of the Canadian company means that global investors are paying great attention.

Given that the rules reflect Australia’s sensitivity, especially to investments by Chinese state-owned companies, an additional twist in AusNet is that one of the vendors would be the Chinese State Network Corporation, which currently owns 19.9% ​​of the company. Approving the deal would remove the State Grid from the image.

“It’s a big case, it’s pretty prominent,” said Tin-Lok ​​Shea, special adviser at H&H Lawyers in Sydney. “If approved, it will be the first time (since January) that a 100% stake will change ownership. It will be a very important transaction.”

“I think there will be concerns if this one is rejected,” he said, “because that would then send a message about Australia’s investment appetite.”

The final decision depends on the state Foreign Investment Review Board (FIRB), which has blocked a number of deals in recent years for reasons of national security.

AusNet’s largest shareholder is also a foreign company: Singapore Power, which owns 32.3%. State Grid is the second largest shareholder, while the balance of about 48% is publicly traded. Since the new rules on foreign investment only apply to new transactions, the previous owners were not affected.

Neither of them has yet shown their hand in public, but both now face a range of options for their ownership. They could either accept Brookfield’s cash offer and abandon the investment altogether with a large profit, or they could negotiate retaining a partial stake. Alternatively, they could accept an offer of cash and shares from APA, which would give them a minority stake in the pipeline company.

Each of these options represents a test of FIRB’s sensitivity to critical energy infrastructure, but some analysts believe Canberra might be inclined to support sales to see the back of the state network.

The resolution could come as early as next month, when the AusNet board will meet with shareholders at the company’s annual general meeting. The winning bidder will then knock on the regulator door for approval.

UBS analyst Tom Allen said he expects the FIRB to apply a high scale because electricity transmission is considered one of the most critical types of infrastructure from a national security perspective.

The changes, introduced on January 1, introduced a national security test for all foreign investment offers for sensitive assets, which now include transactions on a broader list of sectors including defense, telecommunications, gas, electricity, water, ports and more.

The new laws also expanded the powers of the federal government, allowing the treasurer to review or impose terms on the business, and even force the sale, once the deal is approved, if he believes national security is at stake.

Treasurer Josh Frydenberg said last year that all foreign investors would face greater control when bidding for sensitive assets, regardless of the size of the deal and whether the buyer is privately or state-owned, citing the need to balance economic and national security.

“Technology has evolved, and our geopolitical climate has become more complex. In fact, governments around the world see that foreign investment is being used for strategic purposes, not just commercial ones,” he said at the time.

Australian Treasurer Josh Frydenberg, portrayed in a media speech to Parliament in October 2020, indicated last year that all foreign investors would face greater scrutiny when bidding on sensitive assets, citing the need to balance economic and national security. © EPA / Jiji

Even before stricter rules were established, Canberra began shrinking openings as recent geopolitical tensions with China’s leading trading partner spilled over into trade and investment.

In 2018, the nation was ranked fifth in terms of restrictiveness among OECD countries due to its difficult regime of checking and approving foreign direct investment.

Last year, it blocked the sale of the lion’s milk industry and drinks in the amount of 600 million Austrian dollars to the Chinese dairy Mengniu for reasons of national security, which was considered a response to small attempts by Beijing, which hit several Australian exporters with trade sanctions.

The government has also forced the withdrawal of the $ 300 million bid by China State Construction Engineering Corp. for the purchase of the Australian construction company Probuild on similar grounds.

“The tightening of these rules has meant that Australia has become, on paper, one of the most restrictive places to invest,” said Shiro Armstrong, an associate professor at the Australian National University.

The AusNet deal comes at a time when demand for Australian infrastructure is high as global investors are looking for low-risk assets with stable earnings amid growing instability and low interest rates.

Spark Infrastructure signed a $ 3.7 billion contract in August that was taken over by a consortium that included U.S. private equity group KKR and two Canadian pension funds. The transaction is awaiting FIRB approval, although it is likely to get the green light, as Spark owns only minority stakes in electricity grids in Australian states.

Sydney Airport Holdings, which operates Australia’s largest airport, is also in talks with a group of pension funds and global infrastructure partners based in the US about a $ 17.3 billion buyout.

AusNet itself represents an attractive opportunity to invest in a regulated monopoly – it is the operator of the only electricity transmission network in Victoria – and several electricity and gas distributors, with assets of over 11 billion Austrian dollars.

It reported net income of A $ 302.1 million for the 12 months to June 2021, revenue of A $ 1.92 billion and a dividend yield of 5.2%. Analysts expect growth to come mainly from planned investments in Victoria’s electricity grid, which will connect the Snowy 2.0 hydropower project to the state grid.

AusNet reported a net profit of A $ 302.1 million ($ 225 million) for the 12 months to June 2021 (Photo of the Getty Images file)

Still, investors are plagued by uncertainty under new foreign investment laws and are looking for indications of which transactions are welcome and which are not.

“We’ll get some insight into what conditions, if any, the FIRB imposes on the investment. The more sensitive it is, the more likely we are to see a series of imposed conditions,” said Jason Van Grieken, Melbourne’s partner at M&A law firm Arnold Bloch Leibler. .

“In a broader sense, it could give some insight into the scope of the way it will interpret this policy of national interests.”

The issue has already come to the forefront of the fight against AusNet takeovers, with the APA Group trying to win its own slightly higher offer of A $ 2.58 per share from the regulator because of its ability to keep vital infrastructure in Australian hands.

He argued that rival Brookfield would treat the target company as portfolio assets with its operations limited to the state of Victoria.

Brookfield’s Asia-Pacific headquarters in Sydney. The Canadian investment company is expected to emerge victorious in a high and politically sensitive fight to buy AusNet services. © Getty Images

The APA, which has sought opportunities to diversify its existing gas business due to growing environmental, social and governance (ESG) concerns, says it will instead expand AusNet’s electricity business nationwide and accelerate progress in renewable energy.

However, analysts believe that the takeover of AusNet by the APA could face a significant regulatory hurdle for the Australian competition regulator, given its dominance in the gas infrastructure sector.

Meanwhile, shares of AusNet continued to trade slightly above the price of Brookfield’s offer of 2.50 Austrian dollars, which indicates a probably improved offer of the Canadian company. Brookfield no longer has the exclusive rights of due diligence. Last week, the Australian takeover commission equalized the conditions, ordering that all competing bidders get equal access to the books of the target company.

“It’s already pretty close to the bull price, so I don’t think there would be a big jump from these levels,” said Julia Lee, chief investment officer at Sydney’s Burman Invest fund.

He expects Brookfield to come out as the winner, and shareholders will prefer his entire offer over the rival combination of cash and APA shares, though “they could see that it will sweeten the offer a little,” she said.

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