Australian Wine Scandal Opens Door to State Power Sale: Real M&A

May 21, 2014 2:09 am ET

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May 21 (Bloomberg) -- A bottle of 1959 Penfolds Grange wine has opened the door to Asia’s biggest ever sale of power assets.

After failing to disclose a gift of the $2,800 vintage, New South Wales Premier Barry O’Farrell quit last month. His successor Mike Baird, a former banker at Deutsche Bank AG, says Australia’s most populous state needs to shore up infrastructure by investing in roads, railways and bridges. He may sell a state-owned electricity distribution network valued at $33 billion to help pay for them, an amount that would be triple the size of any single sale of electricity or gas assets in Asia, data compiled by Bloomberg show.

The steady returns offered by the regulated power assets could attract buyers such as State Grid Corp. of China or global pension funds, Morningstar Inc. said. Local companies are also potential suitors, with Spark Infrastructure Group saying it would be interested in bidding with a partner. Demand is already so great for government assets in Australia that some are selling for more than double the expected price.

“It’s hard to imagine a better time to sell,” Paul Johnston, an analyst at RBC Capital Markets in Melbourne, said by phone. “There’s lot of money chasing these assets.”

O’Farrell told a corruption inquiry in Sydney on April 15 he had no recollection of receiving wine from a water company executive after winning office in 2011. He stepped down the next day, apologizing for a “massive memory fail” after a thank-you note he’d signed was presented as evidence.

Infrastructure Need

Days later, Baird, the new premier, told Sky News that the need to build infrastructure was “probably the critical issue” facing the state and the government would consider selling the electricity distribution network to raise capital.

“If the cabinet came to a position where we wanted to consider that transaction, we would put it to the people of New South Wales and seek a mandate,” Baird said in an e-mailed reply to questions from Bloomberg News. A state election is due next March. O’Farrell in February had ruled out such a move, according to the Daily Telegraph in Sydney.

The sale of the poles and wires, which carry power to homes and businesses in New South Wales, would follow at least A$9.1 billion ($8.4 billion) of asset sales by the state government in two years. Last month, Hastings Funds Management Ltd. and China Merchants Group Ltd. agreed to buy a 98-year lease for the Port of Newcastle, the world’s biggest export harbor for coal. The A$1.75 billion price topped expectations of A$700 million in January.

Interested Buyers

New South Wales’s three state-owned electricity distributors -- Essential Energy, Ausgrid and Endeavour Energy - - have total net assets of A$7.7 billion, according to their latest annual reports.

The companies are valued together at A$36 billion by industry body Infrastructure Partnerships Australia. On average, they generated a return on equity of 21 percent in the year ended June 2013, their reports show.

“There’s no doubt buyers will be interested,” said Neil McDermott, who runs Sydney-based corporate advisory business Asian Capital Investments Holdings and has advised bidders or governments selling assets in every Australian state. “This is about governments trying to reconcile their balance sheets and raise capital for much needed infrastructure.”

Australia is focusing on infrastructure to spur the economy as mining investment slows. The federal government in its budget released last week committed A$5 billion to give states and territories incentives to sell assets and reinvest the proceeds in roadways other projects.

Steady Returns

While Baird could raise money for New South Wales by listing the power distribution companies on the stock market, governments usually raise more money from a competitive auction, McDermott of Asian Capital Investments said.

The distribution network in New South Wales may appeal to pension funds drawn to the returns that regulated businesses tend to generate. Australian power companies such as Origin Energy Ltd. also may be interested, according to McDermott.

The returns also may attract China’s State Grid, which last year agreed to buy almost 20 percent of Australian power company SP AusNet, said Adrian Atkins, a Sydney-based analyst at Morningstar.

“I’d like to see the state government list it on the stock market for the benefit of mom and dad investors,” Atkins said by phone. “In reality, they will probably look for the highest offer. That will come from a big foreign investor.”

China Demand

State Grid, China’s biggest power distributor, is seeking as much as $50 billion in international assets by 2020. Its return on equity in 2012, at 8.4 percent according to data compiled by Bloomberg, was less than half that of the New South Wales power assets.

Australian utilities such as Duet Group, with electricity and gas distribution businesses in southeast Australia, may want to bid as part of a group, according to Johnston at RBC.

“Who wouldn’t be interested?” he said.

Australian regulatory decisions have increased certainty for investors, adding to the appeal of the electricity businesses, Johnston said. The Australian Energy Regulator, which determines how much a network operator can charge, published new guidelines in December aimed at making the returns that electricity and gas businesses earn more stable.

Sydney-based Spark, which owns stakes in electricity distributors in South Australia and Victoria, would be interested in joining other suitors to bid for the New South Wales assets, spokesman Mario Falchoni said by phone.

Ben Wilson, a spokesman for Sydney-based Duet, declined to comment. Wang Yanfang, State Grid’s Beijing-based spokeswoman, didn’t answer two calls to her office seeking comment. A representative for Sydney-based Origin declined to comment.

Past Precedents

Last month’s deal for the Port of Newcastle, a two-hour drive north from Sydney, follows the sale last year of power stations, and leases of two other ports to a group including Industry Funds Management and a unit of Abu Dhabi Investment Authority. Hastings and Ontario Teachers’ Pension Plan also won the right to lease a desalination plant in Sydney in 2012.

In New South Wales, any electricity network sale faces opposition. The Electrical Trades Union last month said a sale would probably lead to higher power prices.

Unions NSW, which represents more than 600,000 members, has urged communities to oppose a selloff, arguing that income from the networks help fund health care and education. The group last month called Baird an advocate of a deal and said his rise to premier puts the sale of government-owned assets “well and truly on the agenda.”

‘Good Business’

“The public wants to be convinced that this is good business,” David Burchell, an Australian political historian and lecturer at the University of Western Sydney, said in a phone interview. “This is taxpayers’ money.”

A sale of the power assets “should have been done, and could have been done, many times in the last 15 years,” said David Leitch, a Sydney-based analyst at UBS AG. This time it may be different, he said.

“I’m more optimistic about it than I have been for years,” he said. “I have great hopes and expectations for the Baird premiership.”