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APA Plunges Most Since 2008 as Australia Blocks CK Pipeline Bid

Tim Smith and James Thornhill
APA Plunges Most Since 2008 as Australia Blocks CK Pipeline Bid

(Bloomberg) -- Australian pipeline operator APA Group fell the most in a decade after the government blocked CK Group’s proposed A$13 billion ($9.5 billion) offer for the company on national security concerns.

In a preliminary ruling on the offer, Treasurer Josh Frydenberg said Wednesday the deal would be “contrary to the national interest,” and may create too much foreign ownership by a single company group in the gas transmission business. APA declined 9.9 percent to A$8.57 in Sydney.

Analysts said the rejection opened up the prospect of an alternative deal, with the Hong Kong conglomerate potentially teaming up with an Australian partner with a new offer.

Here’s what analysts are saying:

Goldman Sachs

Ongoing regulatory risk to pipeline tariffs and forward earnings are key risks to the outlook for APA’s businessSees increased downside risk as shippers seek a better deal either via arbitration or commercial negotiationSees APA shares trading toward bank’s “fundamental valuation” in the absence of another bidMaintains a neutral rating on the stock with a target price of A$8.30 a share

Morgans

Not clear if it’s a “high conviction” ruling from Treasurer but expect market to read it that waySees APA share price dropping toward the high-A$7 to mid-A$8/share rangeMedia have speculated about possible deal from Industry Funds Management, which wouldn’t have regulatory, concentration concernsDeal may have chance to proceed if CK teams up with other investors willing to pay same priceCK Group may shift focus to another takeover target, Spark Infrastructure, where it already owns 51% of two main regulated assets; SKI deal could occur in 3-6 months

Deutsche Bank:

Group led by CK advised by top Australian infrastructure banks; further investors could be introduced to the consortiumAn alternative bidder may well be waiting for an opportunity given CK has done all the “heavy lifting”

The decision scuppers what would have been the Hong Kong-based conglomerate’s biggest overseas deal, which would have given it control of pipelines that deliver about half of Australia’s gas. Rising electricity prices and blackouts have made energy security a hot political issue in the nation, and an overseas acquisition of critical infrastructure would have been sensitive for Prime Minister Scott Morrison’s government.

Morrison, who served as treasurer before replacing former Prime Minister Malcolm Turnbull in August, has blocked several deals involving China-linked companies in the past three years, drawing ire from the government in Beijing.

Though Hong Kong is part of China, it’s a specially administered region with its own mini constitution that allows for some freedoms more comparable to the West than the mainland. CK companies, which aren’t state controlled, are headed by the son of Hong Kong’s richest man, Li Ka-shing, who retired earlier this year.

CK, whose Australian portfolio includes power distributor Duet Group, has been blocked in the nation before. The government rejected a bid by CK Infrastructure in 2016 for the electricity network Ausgrid, saying it would undermine national security.

The decision risks inflaming diplomatic tensions in China, just as Marise Payne made her first visit by an Australian foreign minister to China in almost three years. Following talks with her Chinese counterpart Wang Yi on Thursday, Payne said the decision to block CK’s offer was “not an adverse reflection on the business itself, on CK Group or its individual companies.”

--With assistance from James Mayger.

To contact the reporters on this story: Tim Smith in Sydney at tsmith58@bloomberg.net;James Thornhill in Sydney at jthornhill3@bloomberg.net

To contact the editors responsible for this story: Divya Balji at dbalji1@bloomberg.net, Jasmine Ng, Aaron Clark

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