Li Ka-shing’s Power Assets and CKI to invest in his troubled Canada-based oil firm Husky
Power Assets and Cheung Kong Infrastructure (CKI), two firms controlled by Hong Kong tycoon Li Ka-shing, have agreed to fork out C$1.15 billion (HK$7 billion) to buy a 65 per cent stake in some oil logistics assets of Li-controlled Canada-based oil firm Husky Energy.
The move would answer expectations of shareholders of international power utility Power Assets from its management to find suitable investment targets for putting its HK$68 billion cash pile to good use. It would also shore up the finances of Alberta province-based Husky, which is enduring rising debt service costs and falling cash flows amid the worst oil slump in decades.
Power Assets chairman Canning Fok Kin-ning said last month that if no “sizeable investment” materialises by the time of its annual shareholders meeting on May 12, a board meeting would be convened to decide on the payment of a special dividend.
The Hong Kong-listed firm has been largely sitting on the war chest since it was amassed since the early 2014 stake sell-down and separate listing of its Hong Kong utility unit. It only spent €144 million of that on a wind power generator in Portugal in October.
“This transaction represents the largest investment that [Power Assets] has made since the spinning off of HK Electric Investments two years ago,” said Power Assets chief executive Charles Tsai in a statement. “In line with our acquisition requirements, this deal provides us with an excellent opportunity to invest in a secure and profitable project that offers immediate cash flow.”
Power Assets has agreed to pay C$865.38 million (HK$5.3 billion) for a 48.75 per cent stake in Husky Midstream, a limited partnership to be set up.
Sister infrastructure investor CKI has pledged to buy a 16.25 per cent stake for C$288.46 million (HK$1.76 billion).
Husky will inject into the partnership Husky Midstream, which owns some 1,900 kilometres of oil pipelines, oil storage capacity of 4.1 million barrels, and other ancillary assets. It will own a 35 per cent stake.
The assets posted a net profit of C$100.28 million last year and C$65.1 million in 2014, with a total asset value of C$963.77 million at the end of last year.
UBS head of Asian utilities research Simon Powell said the acquisition price is fair as it would bring the buyers an estimated cash yield of 4 per cent, and that the assets are valued at 12 to 13 times on an “enterprise value to earnings before interest, taxes, depreciation and amortisation” basis. That
compares to a multiple of 14 of Canadian oil and pipeline operator Enbridge, and 16 times for United States-based gas logistics infrastructure firm Energy Transfer Equity, he said.
Enterprise value is broadly defined as the sum of a firm’s stock market value and its debt minus cash.
“Unlike Power Assets’ current assets, Husky Midstream’s assets are unregulated [on returns], but they provide stable cash flows and provide quite a high return on invested capital,” he said, adding they could add 4 per cent to Power Assets earnings and 1 per cent to that of CKI on an annual basis.
Citi head of Asia utilities research Pierre Lau said in a note that Power Assets management expects an internal rate of return of at least 11 per cent from the deal and that the acquired assets’ net profit could reach C$85 million this year and C$100 between next year and 2019.
Although the acquisition would only deploy less than 10 per cent of Power Assets’ cash pile, Lau’s team has cut the estimate on Power Assets’ potential special dividend to HK$10 a share from HK$20, citing “mergers and acquisitions look [set] to increase”.
Lau noted Power Assets and CKI are in a joint bid for 50 per cent of power grid operator Ausgrid in Australia, against rival bidder State Grid Corporation of China. The result of the bid could be known in one to two months. The Ausgrid stake is estimated to be worth some A$10 billion.
Husky posted a loss of C$458 million in the first quarter of this year, compared with a profit of C$191 million in the year-earlier quarter.
Its debt net of cash amounted to 43.3 per cent at the end of March, up from 28.6 per cent a year earlier.
Finance expense more than doubled to C$107 million in the first quarter, from C$52 million in the year-earlier quarter.
Power Assets shares on Tuesday closed 1.4 per cent lower at HK$76.6 while CKI closed 1.1 per cent lower at HK$74.1. The Hang Seng Index edged up 0.5 per cent.