Victor Li

New CK Hutchison boss Victor Li makes second bold move in a week, with US$10 billion offer for Australian gas pipeline firm APA

Li Ka-shing’s son offers to buy Australian energy firm APA, which delivers about half that nation’s gas through 15,000km of pipelines connecting 1.3 million homes and businesses

PUBLISHED : Wednesday, 13 June, 2018, 10:39am
UPDATED : Tuesday, 03 July, 2018, 8:57pm

Victor Li Tzar-kuoi has embarked on his second major project in the space of a week, after recently taking over the reins of Hong Kong conglomerate CK Hutchison from his famous billionaire father Li Ka-shing, with an A$13 billion (US$9.9 billion) offer for Australian gas pipelines company APA Group.

The proposal, made jointly by CK Asset Holdings, CK Infrastructure Holdings and Power Assets Holdings, is to buy the whole of APA, according to a filing to the Hong Kong stock exchange.

The price is A$11 per share in cash, equivalent to a premium of 33 per cent from Tuesday’s closing price. On Wednesday, shares in APA jumped 21 per cent to A$10 in Sydney.

Shares in CKI and related firms were generally lower amid an overall slide in Hong Kong’s stock market. CK Hutchison Holdings dropped 2.2 per cent to HK$89.50 and CK Asset slipped 0.82 per cent at HK$66.20. CK Infrastructure Holdings eased 0.25 per cent to HK$59.35 while Power Assets Holdings rose slightly by 0.3 per cent to HK$55.95.

“The proposal to acquire APA is a non-binding one with a number of pre-conditions to be met,” said Edmond Ip, deputy managing director of CK Asset Holdings and deputy chairman of CK Infrastructure Holdings.

“Currently the process is still at a preliminary stage and the transaction may or may not be undertaken.”

APA Group owns and operates some A$20 billion worth of natural gas pipelines, storage facilities, gas-fired power stations and wind farms across Australia. A 50 ASX-listed company, it delivers about half of the nation’s gas and has 15,000 kilometres of pipelines connecting 1.3 million homes and businesses.

Victor Li finally emerges from the shadow of his Superman father Li Ka-shing

Simon Powell, head of Asian utilities research at UBS, said the acquisition price represents a 14 times multiple of APA’s enterprise value over its earnings before interest, taxes, depreciation and amortisation (Ebitda). Enterprise value is the sum of market capitalisation and debt.

“While this is not cheap, it is not too expensive, given APA is expected to see robust growth next year and 2020 as it has announced expansions requiring capital expenditure of A$1.2 billion,” he told the Post.

The CK group of firms could also potentially help APA lower its average financing costs – currently estimated at 5.5 per cent – by 50 to 100 basis points, he added. One basis point equals 0.01 per cent.

CKI and its related firms controlled by the Li family already own several major gas distribution assets in Australia through previous takeovers of Duet Group and Australian Gas Networks. If they complete the acquisition of APA, they could control over half of the nation’s gas transmission and distribution market, giving competition watchdogs cause for concern.

“However, we believe CKI would have checked with the regulators before submitting its conditional non-binding indicative offer to conduct its due diligence on APA,” wrote Dennis Ip, head of Hong Kong and China utilities, renewables and environment at Daiwa Capital Markets in a note. “We would expect CKI to sell some of APA’s stakes in Goldfields pipeline, Parmelia gas pipeline, Mondarra gas storage facility to obtain [regulatory] approval.”

The CKI consortium has informed APA that it has had discussions with both Australia’s Foreign Investment Review Board and the country’s competition watchdog, APA said on its website.

It offered a divestment package which would include APA’s interests in the Goldfields Gas Pipeline, Parmelia Gas Pipeline, Mondarra Gas Storage Facility and a stand-alone management team.

“The board believes APA has a very attractive business and is well-positioned to continue delivering strong results and ongoing growth irrespective of whether the proposal proceeds to an offer,” APA group chairman Michael Fraser said on the company website.

Assuming the takeover bid is 40 per cent paid by cash and 60 per cent by debt and that each of CKI and CKA takes a 40 per cent stake and Power Assets a 20 per cent stake, CKI’s net profit could be increased by 11 per cent next year if the deal is completed by year-end, according to Ip’s calculations.

He did not expect CKI will need to issue shares to fund the deal since it has the capacity to issue some US$800 million of perpetual bonds, which could lower its net debt-to-shareholders’ ratio back to 21 per cent after it rises to 27 per cent immediately upon the deal’s completion from 15 per cent currently, he said in a note.

The Li family-led group can also elect to have CKA take on a higher stake of up to 49 per cent in the takeover bid so that CKI will not have to take on as much new debt, he added.

The offer comes just a week after Li was reported to be planning to redevelop the 44-year-old Hutchison House office tower in the city’s Central district.

The building, which is next to the world’s most expensive commercial plot, a former car park in Murray Road, is expected to triple in value from the redevelopment, analysts said.

It also marks Victor Li’s emergence from the shadow of his father, a Hong Kong rags-to-riches legend nicknamed “superman” for his deal-making prowess who retired at the conglomerate’s annual meeting in March at the age of 89.