The Australian Treasurer last night announced his preliminary decision to block the proposed AUD$13bn takeover of APA Group by Hong Kong listed CK Infrastructure Group (CKI).

Why was it blocked?

The Treasurer's initial comments indicate that the decision is based on concerns about undue market concentration; that is, aggregation of ownership of a particular (and important) asset class by a single foreign person.

Competition clearance for the transaction was received in September 2018 after the ACCC accepted an enforceable undertaking by CKI to divest certain pipelines and a gas storage facility of APA in Western Australia if the transaction proceeded. This difference in outcome highlights that the 'national interest' factors considered by the Foreign Investment Review Board (FIRB) in advising the Treasurer include the impact on competition in Australia, which is a test that is generally accepted to be broader than the ACCC's remit under the Competition and Consumer Act 2010 (Cth).

In addition, the Treasurer noted CKI's existing portfolio of assets in the gas and electricity market in Australia resulted in a market concentration concern, particularly due to the size and scale of the APA Group and the critical nature of the infrastructure assets held by APA Group, rather than any national security concerns associated with the asset or CKI.

The Treasurer noted that the FIRB was not able to come to a unanimous decision in their advice to him, which is an insight into the decision-making process here. The FIRB worked with numerous agencies to advise the Treasurer, including the recently established Critical Infrastructure Centre.

There are no co-incidences in politics?

As the application has been with the Treasurer since around August, the timing of the announcement coinciding with the China International Import Expo, one of President Xi’s new signature multi-lateral engagement initiatives underway in Shanghai, the Australian Foreign Affairs Minister visiting Beijing for the first time in three years today and increasing domestic concerns around energy pricing and political promises to achieve meaningful savings – will be seen as curious by some.

Like the other five public decisions to block major transactions over the last 20 years, the Treasurer was at pains to try and limit this decision to the particular facts, and appears to have accepted that CKI – a listed Hong Kong company – should be considered as a stand-alone company and not aggregated with other Chinese investments in Australia.

Given how rare these decisions are, people will always speculate on matters of timing and detail. That speculation should not distract from either the very high acceptance rate of foreign investment into Australia (including from greater China) or the very robust, increasingly diversified Australia-China trading relationship. We don’t expect either to change in the short, medium or long term as a result of this decision.

Parallels with other decisions

This is the second time that CKI has been blocked by FIRB in Australia. It can be distinguished, however, from the previous time in 2016 that CKI, along with State Grid of China, was blocked as a participant in the partial privatisation of Ausgrid. In that case, both foreign parties were blocked on national security grounds specific to that asset and it was ultimately acquired by an Australian consortium. Nonetheless, we do understand that market concentration was another potential national interest concern at that time. It should be noted that despite those decisions, CKI and State Grid have previously received FIRB clearance for numerous other acquisitions in Australia.

The decision to block the acquisition of APA Group is more akin to the decision in 2013 by the then Treasurer to block the acquisition of Graincorp by Archer Daniels Midland. Similar to that decision, the current decision to block the transaction was also made after competition law clearance was issued by the ACCC and the FIRB being unable to reach a unanimous recommendation. Here, competition clearance was received in September 2018 after the ACCC accepted an enforceable undertaking by CKI to divest certain pipelines and a gas storage facility of APA in Western Australia if the transaction proceeded.

In another potential parallel to the Graincorp decision, though not expressly stated for the APA Group decision and noting our caution above, the Treasurer may have taken into account the broader community concern in respect of electricity and gas pricing in Australia in reaching a decision. That is, the current government's focus on reducing electricity and gas pricing, which has moved slowly at a retailer level, can perhaps be seen as a minor factor in this decision to prevent further market concentration at the distribution level.

What next?

It seems unlikely that CKI will be able to proceed with a control transaction with APA unless it dramatically changes the deal – eg, by introducing a majority Australian partner and potentially agreeing to divest additional assets.

This approach was adopted by Australian Outback Beef (advised by MinterEllison) and ultimately successful on the Kidman cattle transaction – also too big initially for a single foreign person to acquire (with some additional national security concerns as well). It would be understandable though if CKI did not have the appetite in the circumstances.

More broadly, it remains the case that transactions blocked by successive Treasurers are few and far between and that the majority of transactions are cleared by FIRB on an unconditional or conditional basis. The Treasurer yesterday emphasised that Australia remains open for business.

Noting the mix of factors that are in play in the APA Group decision, it does seem to us that this decision should be viewed as limited to its facts – that is, a decision based on the nature of the APA Group and the existing asset portfolio of CKI, rather than a broader commentary on either CKI or a limit to Australia's genuine openness to investors from any particular country.

While we have no doubt that CKI and its advisers adopted a sophisticated and thorough FIRB engagement strategy, the decision is another reminder of the breadth of the FIRB regime, the Treasurer's absolute discretion and the importance of engaging with the key stakeholders from a commercial, legal and political perspective.