Ann: Confirmation of Proposal to AusNet Services, page-19

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UniSuper backs APA bid for AusNet

Angela Macdonald-SmithSenior resources writer

Sep 22, 2021 –4.29pm

Gas pipeline giant APA Group has got strong supportfor its surprise $9.96 billion takeover bid for AusNet Services with itsbiggest shareholder, UniSuper, backing the move despite the “sharp” price.

UniSuper chief investment officer John Pearce saidthe takeover of the Victorian transmission grid owner would shift APA away fromits almost total reliance on gas, making it a more diversified business andpotentially lowering its cost of capital in the transition to lower carbonenergy.

It would also effectively rule out APAcontinuing to pursue an acquisition in gas infrastructure in the United States, which would likely not be well received by shareholders, Mr Pearce said.

“It’s always more risky doing something overseasrelative to your home base,” he told The Australian Financial Review.

“So if you’re going to pay up for an asset – andyou have to pay up for assets wherever you are in the developed world – it hasto diversify your business and ideally, it’s going to be in your home base.”

UniSuper owns about 14 per cent of APA.

However, APA is pitting itself against Canadianinfrastructure giant Brookfield in its play for AusNet, which is widely regarded as having theupper hand in the tussle due to its exclusivity on due diligence despite its lower offer.

APA is proposing a cash and scrip bid worth $2.60per share when it was made, compared to Brookfield’s an all-cash $2.50 pershare.

But APA’s improved offer, revealed on Tuesday,“fails to pack enough punch” to break Brookfield’s exclusivity on due diligence announced the previousday, noted UBS analyst Tom Allen.

“We believe APA’s strategy is to amplify theForeign Investment Review Board approval risk of the Brookfield bid and applypressure on AST’s Board to consider breaking its exclusivity arrangement withBrookfield,” Mr Allen said.

“While the latter has been unsuccessful thus far,we believe it is possible APA may submit a stronger bid for AST over the comingweeks.”

UBS said it regarded the risk around majorAusNet shareholders Singapore Power and China State Grid was greater in the APA proposal, which would also face more competition issues although fewer concerns over foreign investment.

Morningstar deemed APA’s bid as preferable forAusNet shareholders, pointing to the high quality of APA’s business, even asits shares trade below its estimate of fair value.

Renewable energy industry insiders are also mostlyfavouring APA’s bid over Brookfield’s, with one saying that a more transparent,accountable ownership through a publicly listed company would ensure betteroutcomes on transmission investments.

Renewables developers are concerned that sometransmission projects vital to support the transition to renewables areprogressing too slowly, particularly in NSW, and regard an APA-owned AusNet aslikely to push forward more aggressively outside its home market of Victoria.

Mr Pearce said he was surprised that Brookfield hadbeen granted such a long exclusivity period and voiced optimism that APA wouldsecure early access to AusNet’s books.

“It certainly shouldn’t take that long to get yourmind around electricity transmission assets,” he said.

“So hopefully the board will see a way to lettingAPA in the tent a bit earlier.”

APA shares on Wednesday recovered some of theground they lost on Tuesday after news of its offer, and were up 1.7 per centat $8.60 in mid-afternoon trading.

Tuesday’s drop of 5 per cent in APA stock was seenas a sign of investors’ reservations about the proposed deal, and the steepprice, which is higher on relative terms than the $5.2 billion takeover dealfor AusNet’s peer Spark Infrastructure.

Mr Pearce said that while “we would like it at amuch lower price”, “stretched” valuations on infrastructure were par for thecourse now.

“It goes without saying, this is a sharp price, butif you look at these types of assets, it’s the world we’re living in now,valuations looked absolutely stretched,” he said, pointing to the “really full”valuation in the $8.75-per-share bid forSydney Airport.

“So we would much prefer a lower price, but thereare a couple of things that are positives from our angle.”

Mr Pearce said a takeover of AusNet would reduceAPA’s reliance on gas from about 90 per cent to about 50 per cent and add diversification.

“I think over time, you’re seeing with this apotentially re-rating of their cost of capital as they transition theirbusiness,” he said.

“The other thing too, is that I’m seeing this asbasically, if this deal gets done, it rules out doing any major expansion inthe US. I think that that’s a positive for shareholders because I don’t thinkexpanding the gas footprint, in particular in the US, will be well received byshareholders.”