Envestra directors unanimously recommend cash offer from CKI

Key points:

1. CKI has agreed to make a conditional off-market takeover bid to acquire all of Envestra’s shares for cash consideration of $1.32 per share
2. The base case expectation is that, should Cheung Kong emerge as the successful bidder, its majority ownership of Envestra would be supportive of Envestra's creditworthiness.
3. However, there is still some uncertainty around Cheung Kong’s strategic intentions towards Envestra's business profile and desired capital structure, given the limited information in this regard.

CKI Takeover Offer

Last week, Envestra announced to the market that it has entered into a Bid Implementation Agreement with a consortium led by the Cheung Kong Group (CKI/Cheung Kong).

CKI has agreed to make a conditional off-market takeover bid to acquire all of Envestra’s shares for cash consideration of $1.32 per share.

The offer will be financed through the existing cash reserves and credit facilities available to Cheung Kong.

The CKI offer is conditional on a number of factors, including:

• CKI acquiring a relevant interest in more than 50% of Envestra shares (which includes CKI’s 17.46% holding of Envestra shares)
• Binding confirmations being provided by a sufficient number of Envestra’s financiers (including noteholders) that are owed in aggregate not less than 51% of Envestra’s total financial indebtedness that they will not declare any Envestra change in control resulting from the offer to be ‘unacceptable’ for the purposes of the Intercreditor Deed Poll to which Envestra is a party
• No event of default occurring under the Intercreditor Deed Poll

What does this mean for the rival APA proposal?

The market view is that it is unlikely APA will come back with a higher offer. APA is reported to view CKI’s offer as high, and should APA sell its 33% stake in Envestra to Cheung Kong, the $790m proceeds would open up the potential for APA to undertake capital management activities such as a share buyback.

If the CKI takeover does proceed, what are the likely implications for Envestra’s credit?

• On a stand-alone basis, Envestra is positioned strongly with an underlying investment grade rating and Cheung Kong also exhibits a solid investment grade credit profile.
• There is still some uncertainty around Cheung Kong’s strategic intentions towards Envestra's business profile and desired capital structure, given the limited information in this regard.
• The acquisition of Envestra will add to Cheung Kong’s existing regulated assets in Australia, including 51% stakes in SA Power Networks in South Australia, CitiPower and Powercor in Victoria. It is noted that Cheung Kong has to date shown a commitment to maintaining investment grade ratings for its other Australian investments.
• Factors to consider in assessing credit implications include whether Cheung Kong uses a heavily debt funded vehicle to acquire Envestra's shares or whether Cheung Kong will materially restructure the company. These approaches could be credit negative for Envestra especially if the company encounters significant cash flow demands from its new majority shareholder or change to its core business strategy.
• The base case expectation is that, should Cheung Kong emerge as the successful bidder, its majority ownership of Envestra would be supportive of Envestra's creditworthiness. Cheung Kong has a demonstrated track record in allowing its Australian subsidiaries to:
  • be managed and financed independently, and
  • preserve a strong investment grade rating.

Value

• Currently offering a real yield of 3.09% per annum, the Envestra 2025 capital indexed bonds offer long term inflation protection with exposure to a conservative infrastructure asset.
• Under a capital indexed bond, the principal component of the bonds is indexed by the quarterly change in the CPI (from their issue date). The principal component of the bonds is therefore maintained in real terms. A coupon rate is payable on the amount of indexed principal at each quarter end, providing inflation protection to investors.
• The capital indexed bonds have the enhancement of a credit wrap by Assured Guaranty. We believe the market currently undervalues the enhancement provided by the Assured Guaranty wrap, and note Assured Guaranty’s credit rating was upgraded in March.

For more information please call your local dealer.

Note: Prices are accurate as at 3 June 2014 but subject to change.