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What International Investors See...& We Miss
BY MATT HIBBARD - 15/06/2018 | VIEW MORE ARTICLES BY THE DAILY RECKONING

Shareholders in APA Group [ASX:APA] will no doubt be patting themselves on the back.

Yesterday, APA received a takeover bid from a consortium led by CKI Group. If you are not familiar with APA, it owns Australia’s largest network of gas pipelines.

CKI’s $11 indicative bid price puts a $13 billion value on APA. That’s around one-third higher than its closing price the previous day.

And for investors that have held shares over the last decade, a near fourfold increase in the share price. That’s before you include dividends.

For Aussie investors, the name CKI probably rings a bell. It’s not the first time the Hong Kong-based company has invested in Australia.

In late 2016, it lobbed a $7.3 billion all-cash bid for DUET Group. CKI were keen to get their hands on DUET’s stakes in power and gas transmission networks in SA, WA and Victoria.

That came on top of CKI’s holdings in other power networks. CKI owns a controlling interest in Powercor and CitiPower in Victoria. It also has a controlling interest in SA’s ETSA Utilities. Plus stakes in other power transmission businesses as well. 

More than one deal in play

CKI’s bid comes hot on the heels of another mega takeover play. French-based Unibail-Rodamco recently gobbled up Westfield Corporation [ASX:WFD] in a $30 billion deal. 30 May was the last time we saw WFD’s ticker symbol trade on the ASX.

With a bid at a sizeable premium to the share price, APA agreed to let CKI take a closer look at its books. The bid is non-binding, meaning that CKI can walk away if due diligence does not pass muster.

There are other conditions as well. It needs shareholder approval from one of the consortium partners. The deal is also dependent on APA directors supporting the bid and voting in favour of it.

The big test, though, might prove to be regulatory. To be successful, the deal needs to pass the ACCC and FIRB (foreign investment review board).

CKI already owns, or has a controlling stake in, a string of power assets. However, it hasn’t always got its way.

Just under two years ago, Treasurer Scott Morrison blocked CKI’s bid for Ausgrid on security grounds. Later that same year, the NSW government sold a half-stake in Ausgrid to local investors — IFM Investors and AustralianSuper — in a deal worth $16 billion.

Foreign investment, though, remains a contentious issue. CKI’s latest bid might once again come into the national spotlight.

But what is it that international investors see that local investors don’t?

Paying a premium for income

Perhaps it is simply a matter of overseas investors paying too much. Like Japan Post’s $6.5 billion takeover of Toll Group in 2015.

That deal came at an almost 50% premium to the previous day’s price. Yet within two years, Japan Post had to write down the value of Toll by a whopping $4.9 billion. Along with that came the later loss of around 1700 jobs.

While Japan Post admitted it paid too much, it remains locked into Toll. In December last year, The Australian Financial Review reported that Japan Post still wants to use Toll as a launching pad for other global deals.

Ultimately, success depends on your timeline. Japan Post might yet cut its losses and offload Toll. Although, If it can turn the Toll deal around, Japan Post might look back in a decade or two and think it got a good deal.

It’s the same with the Westfield deal. And it’s likely the same with the failed bids for Santos Ltd [ASX:STO].

You’ll notice that these bids are for companies with two key aspects. The first: hard to replace (or irreplaceable) assets — such as an energy grid, pipeline or shopping mall.

And the second relates to the first. That is, a steady stream of reliable and growing cash flows. That’s where the value of these assets lie.

What they are not, are bids for companies with second or third-rate assets. If the assets are strong, and the management weak, the new owner can simply put a new CEO in charge.

With rising interest rates in the US, you would expect infrastructure and REITs to come under pressure. Because they attract similar investors, money flows out of these sectors and into bonds.

Yet despite this, overseas investors seem to see what we can’t. They continue to bid for our infrastructure and real estate assets.

Buying a stock in the hope of a takeover deal is a low probability deal. But there is a hidden value in stocks — something the market misses.

That is, companies with irreplaceable assets and strong and reliable cash flows. These are the type of stocks that hold up best, particularly as the market becomes more volatile.



View More Articles By The Daily Reckoning

The Daily Reckoning's mission is to look at the investment world and the financial world in a sceptical and contrarian way. To do that day in and day out and tell you honestly what we see, even if it isn't always popular. If you'd like to subscribe to an alternative look at the mainstream interpretation of events, join for free here.



 

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