AusNet Services: AST joins the takeover list

About the author:

Nathan Lead
Author name:
By Nathan Lead
Job title:
Senior Analyst
Date posted:
22 September 2021, 8:15 AM
Sectors Covered:
Infrastructure, Utilities

  • AusNet Services (ASX:AST) has surprised with an announcement of a takeover bid from Brookfield. This continues the intense M&A activity in the ASX-listed infrastructure space following bids for Sydney Airport and Spark Infrastructure.
  • 12 month target price aligned to (login to view) indicative takeover price. HOLD retained.

Event

AST has received a takeover bid from Brookfield, which the Board plans to endorse when a binding offer is provided.

Details

The indicative takeover offer price is $2.50/s all-cash (to be reduced by dividends declared/paid prior to completion).

AST is allowing Brookfield to conduct due diligence on an exclusive basis to enable it to put forward a binding offer. AST’s Board intends to recommend the binding offer in the absence of a superior proposal and subject to an independent expert’s report.

AST said that it had already received a bid of $2.35/s on 30 August from Brookfield and a subsequent proposal of $2.45/s. Investors will be surprised that this information had not been released to the market.

Brookfield’s takeover price is a 26% premium to last Friday’s closing price, so within the 20-30% takeover premium expected by Australian investors. We also estimate the bid price implies 1.53x EV/Regulated-and-contracted asset base, above the 1.46x EV/RCAB implied by SKI’s takeover price.

The proposal is indicative, non-binding, and conditional. Conditions to the takeover include due diligence (underway, but we’d be surprised if there was issues given AST’s statutory and regulatory information disclosures), FIRB approval (we assume this should be low risk given Brookfield is a Canadian alternative asset management company), Board recommendation (a willingness to commit has already been given), and execution of a scheme of arrangement deed.

Forecast and valuation update

Forecast changes relate mainly to altered macroeconomic assumptions (lower inflation and interest rates), as well as finalised Electricity Distribution 2021-22 pricing. FY22/23/24F NPAT adjusted by -9%/+2%/+7%; our forecasts are materially below consensus, mostly on lower revenue.

Stand-alone valuation has increased 1 cps to $1.84ps, due to forecast changes.

Synergies that Brookfield could be pricing into its takeover offer above what we assume within our stand-alone valuation include removal of ASX listing-related costs, increased gearing, tax cost base step-up, and lower target returns. A dis-synergy could be reduction in credit ratings and stamp duty.

12 month target price set in-line with indicative takeover price of (login to view).

Investment view

Hold retained. At current prices, the upside if the bid proceeds is c.6%; the downside if the bid falls away and the price returns to where it was pre-bid is c.- 21%.

Price catalysts

A counter-bid emerging (for instance, will APA with its electricification ambitions consider a bid, given Singapore Power and State Grid Corporation of China may be willing sellers?).

Confirmation of a binding offer with government approvals.

Risks

A bid not proceeding or extended delays in an agreed deal’s completion. Key here is the support of AST’s two largest investors Singapore Power (32.1%) and State Grid Corporation of China (19.9%), with whom we presume Brookfield has negotiated this bid but at present we have no confirmation of their endorsement.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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