Australia is one of Asia’s most open markets when it comes to foreign ownership of local companies. But it is also striving to protect local interests.
Last week, Australian treasurer Josh Frydenberg shocked the market by revealing his preliminary decision to reject the proposed A$13 billion ($9.5 billion) takeover of APA Group by Hong Kong’s CK Infrastructure, sending the Sydney-listed company's share price down nearly 10% in the following day's trade.
While Frydenberg’s decision is not yet final, the chance of Hong Kong billionaire Li Ka-shing and his CK Group solely taking over Australia’s largest gas distributor is now extremely low. The treasurer has also, practically, turned down what would have been the second-largest inbound acquisition in Australian dollar terms.
The treasurer’s statement came as a surprise because the APA board recommended shareholders vote for the bid. The transaction had also already been approved by the Australian Competition and Consumer Commission, implying the government did not foresee any antitrust issues with the takeover.
Frydenberg said his decision was made on the grounds that the transaction would result in an undue concentration of foreign ownership by a single company group in Australia’s most significant gas transmission business, and as such it was not in the national interests.
Investors might recall a similar case two years ago when Australia’s Foreign Investment Review Board blocked a joint $7.7 billion takeover by CK Infrastructure and the State Grid of China for Ausgrid, the power distributor owned by the New South Wales government.
But that particular failed deal involved a Chinese state-owned entity, which at the time raised separate concerns over the Chinese government’s increased influence in Australia’s power network, some analysts have pointed out. This time there was no Chinese state capital involved, so the decision against APA was made specifically just to keep major power assets in domestic hands.
EXCESS FOREIGN OWNERSHIP
It is an important distinction that suggests Australia has reached a tipping point over foreign ownership of power assets, with foreign companies taking a significant stake in the power network in six out of Australia's eight states and territories.
Hong Kong electricity producer CLP Group fully controls EnergyAustralia, one of the country’s three biggest power generators, and China’s State Grid partly owns three of five power distributors in the state of Victoria.
Meanwhile, CK Infrastructure owns a majority state in SA Power Networks, the sole power distributor in South Australia. It also led the $5.5 billion buyout last year of Duet Group, which owns a power grid and gas pipelines in Western Australia.
Any sale of APA Group will further open up Australia’s power network and allow foreign companies to take control of 56% of the nation’s gas pipeline transmission system, including 74% of New South Wales and Victorian pipelines and 64% in the Northern Territory.
Foreign influence aside, the Australian government more generally is looking to avoid over-concentration in the energy sector to prevent generators and distributors from manipulating prices. That's after the country’s wholesale electricity prices rose by 130% on average between 2015 and 2017, according to a report by policy think tank Grattan Institute in July.
Although Frydenberg has reiterated that Australia remains committed to welcoming foreign investment, prospective foreign buyers of Australian assets could turn cautious in the short term. The move nonetheless sends an important message that the government is doing its job in balancing local interests against foreign investment.
