After the surprise rejection of two Chinese bids for electricity transmission network Ausgrid, IFM Investors and AustralianSuper took advantage of the situation to swoop in with an unsolicited proposal.

The government of New South Wales had moved State Grid Corporation of China and Hong Kong-based investment firm Cheung Kong Infrastructure (CKI) (controlled by billionaire Li Ka-Shing) to final bid stage, but then Australia’s federal government surprised the market by disqualifying those bidders on 11 August.

Home advantage

AustralianSuper and IFM Investors reacted to the news of the Chinese bids being disqualified by readying a new joint offer for the assets. IFM, among various other major investors, was rumoured to have entered an indicative bid for Ausgrid back in January. But by the time the deal had got to binding bid stage, IFM and the others had fallen away, with a least one of the remaining Chinese bidders understood to be offering a market-beating price.   

Once CKI and State Grid were out of the race, the AustralianSuper and IFM consortia submitted an unsolicited proposal on 23 September to acquire the majority stake in the business. It took the state government of New South Wales less than a month to accept the bid. 

“We are familiar with the process and policy framework of unsolicited proposals and began developing our strategy for Ausgrid within days of the federal government’s announcement,” Michael Hanna, IFM’s head of infrastructure, Australia told IJGlobal.

IFM has submitted unsolicited proposals for the M5 Interlink Roads, Brisbane International Cruise Terminal and most recently in early October, a proposal to upgrade and expand the capacity of Southern Cross Station in Melbourne that it originally acquired in 2003. An extension to the PPP concession term could assist the funding of the development, IJGlobal understands.

Another advantage was IFM’s involvement in the bidding for the previous A$10.3 billion ($7.79 billion) “poles and wires” privatisation of TransGrid last year. IFM, with partner QIC, proceeded to the final bid stage before losing out to a consortium led by Hastings in November. 

IFM says that the New South Wales government's desire to keep to its original timeline for disposal was a major motivation in putting a bid together quickly.

“We wanted to help address a problem the state government wanted resolved sooner rather than later with an innovative solution,” Hanna said.

The speed at which IFM and AustralianSuper provided a “quick, full value and clean” bid helped keep the deal to its original deadline, according to David Ryan, partner at Herbert Smith Freehills, who advised the two funds.

The A$16.2 billion transaction, with a debt-to-equity ratio of around 60:40, is scheduled to close in early December. The debt financing package is expected to be a mix of three, five and seven-year tranches, with a syndicate including the big four Australian banks, ANZ, CBA, NAB and Westpac, as well as various Asian and European banks.

IFM Investors is understood to have paid 1.4x Ausgrid’s regulated asset base (RAB) of A$14.75 billion, compared to the 1.3x offered by CKI and the 1.6x tabled by State Grid.

AustralianSuper and IFM will own a 50.4% stake in the 99-year concession to Ausgrid, Australia’s largest grid under the RAB model and number of customers. Ausgrid maintains and operates the electrical distribution networks to 1.6 million customers in New South Wales.

IFM Investors and AustralianSuper were advised by Macquarie and Herbert Smith Freehills on the Ausgrid acquisition and by Ashurst on due diligence and financing, while UBS, Deutsche Bank and Allens advised the State Government and Clayton Utz advised the banks.

Head scratching all round

While the all-Australian team may have taken the prize and saved the privatisation from a potentially long delay, the federal government’s decision to block the Chinese companies’ bids has left many questions unanswered.

One is the exact reason why the State Grid Corporation of China and CKI’s bids were rejected. The federal government has yet to elaborate on why the two consortia’s bids were deemed, as federal state treasurer Scott Morrison asserted at the time, to be “contrary to the national interest.”

One major concern raised, given Australia’s extensive privatisation pipeline, is whether the federal government’s decision on Ausgrid could potentially weaken foreign investors’ appetite for the country’s assets.

While both IFM’s Hanna and Herbert Smith Freehills’ Ryan called for more clarity from the outset from the Foreign Investment Review Board (FIRB), Ryan dismissed concerns about the impact on foreign investors.

“While there is no clarity on why the Chinese bids were blocked, the issue appears to have been specific to the asset – electricity transmission networks - rather than the investor,” said Ryan.

“FIRB should not have allowed bidding to proceed to the final bid stage. FIRB needs to be clearer and provide more transparency about the criteria and limitations for foreign ownership at the outset of the process,” he added.

In the wake of the Ausgrid controversy, the New South Wales government may be considering different routes for the next “poles and wires” privatisation, the just over 50% sale of Endeavour Energy, valued at around A$3 billion.

One more politically palatable option may be an initial public offering rather than a trade sale, although Ryan cautioned that a stock exchange listing typically raises less money for the state.

While it remains to be seen whether the FIRB will clearly spell out the rules at the beginning should Endeavour Energy be privatised in a trade sale, Ausgrid is expected to be an exception rather than a template.

The Ausgrid sale “required a unique solution which we provided,” IFM’s Hanna said.