09 December 2016

Tycoon Li Ka Shing pursues another Australian energy firm

After failing to acquire power transmission firm Ausgrid months ago, Hong Kong billionaire Li Ka Shing is giving Australia’s lucrative energy sector another shot. This time he is pinning his hopes on Duet Group with a takeover offer worth around AUD 7.30 billion (USD 5.44 billion). His flagship company Cheung Kong Infrastructure Holdings this week proposed to purchase each share in the utility firm for AUD 3.00, representing a 27.7 per cent premium over the target’s closing price on 2nd December, the last trading day prior to the deal being announced. The news fueled investor enthusiasm, causing Duet Group’s shares to close 16.6 per cent higher on 5th December.

Backed by shareholders including Beulah Capital, Unisuper and Lazard Asset Management Pacific, Duet Group invests primarily in utility assets and owns gas pipelines and electricity distribution networks that serve customers in Western Australia and Melbourne. Structured in a way similar to other utility companies, it is comprised of four entities, whose equities are stapled together, allowing them to trade as a collective group on the Australian Securities Exchange. Two of these entities hold equity stakes in pipelines, while the other two, which act as Duet Group’s financing arm, have provided debt to United Energy, a Victoria-based electricity distributor.

Fond of deploying his capital abroad, Li has in recent years shown particular interest in UK assets. Through his company Cheung Kong, he has invested billions of dollars in the country’s infrastructure. Some of his most notable deals include the GBP 2.43 billion acquisition of Eversholt Rail Group, a rolling stock operator, which took place last year. In 2011, Cheung Kong bought water supplier Northumbrian Water Group for GBP 2.41 billion and a year before that, it purchased EDF Energy’s power assets for GBP 5.78 billion. However, in a surprise move, the UK in June this year voted to leave the European Union, which casts uncertainty over the economy. The Duet Group deal thus works to diversify Li’s investments away from the country, according to Bloomberg. Furthermore, his failed bid to acquire UK telecommunication provider O2 back in May might have prompted him to shift his focus to Australia.

Unfortunately, Cheung Kong’s proposal came at a time when the Australian government has become increasingly wary of foreign investors, particularly China, currently the largest investor in the country’s agricultural assets, according to the Wall Street Journal. This is especially evident when Australia’s Treasurer Scott Morrison blocked State Grid and Cheung Kong’s attempt to take over Ausgrid on national security grounds in August. Last year, the resource-rich country halted Shanghai Pengxin Group’s bid to acquire cattle farming company S. Kidman & Co, whose private land holding, according to the Sydney Morning Herald, constitutes about 1.3 per cent of Australia’s total land mass. 

It remains to be seen if Li will succeed this time round. Even if regulators disapprove of the deal, Cheung Kong could in theory still try to appease them by co-investing in Duet Group with a local bidder. But before the Hong Kong conglomerate can worry about that, it first needs to get past Duet Group’s board, which is currently still evaluating the proposal.  

© Zephyr