Tuesday 24 January 2017 by FIIG Research Company updates

DUET Group subsidiary DBNGP Trust placed on CreditWatch

DUET Group has put forth a proposal for a consortium to acquire all its stapled securities on issue, with the ratings of four Australian subsidiaries – including DBNGP Trust – placed on CreditWatch in response to the announcement

The boards of DUET Group (DUET) announced it had entered into a scheme implementation agreement with a consortium, in which one or more members of the consortium will acquire 100% of DUET’s stapled securities on issue. The consortium is led by Cheung Kong Infrastructure Holdings Limited (CKI), and also includes Cheung Kong Property Holdings Limited (CKP) and Power Assets Holdings Limited (PAH).

In response to the announcement, S&P has placed the ratings of DUET’s four Australian subsidiaries – including DBNGP Trust (DBNGP) – on CreditWatch with positive implications, reflecting the rating agency’s expectation that DUET’s subsidiaries could benefit from CKI’s stronger credit quality. CKI, an infrastructure company owned by Hong Kong listed conglomerate CK Hutchison Holdings, has annual revenues and adjusted EBITDA of around USD700m and USD375m respectively, and a current market capitalisation of approximately USD21.2bn. CKI and PAH currently own and operate various other regulated utilities in Australia and the UK, and CKI has demonstrated a sound operating track record as well as conservative financial management. Further, it has demonstrated a willingness to support previous investments through capital injections and dividend retentions, which has garnered support for the company’s creditworthiness from rating agencies.

The rating agency expects to resolve the CreditWatch upon completion of the acquisition, as it becomes clear how the ownership of the assets will be split among consortium members. CKP is primarily a real estate development company and S&P regards its involvement in the consortium as purely financial. However, in the event that shareholders do not approve the proposed acquisition of DUET and CKP proceeds with the proposed acquisition, S&P is likely to regard the new ownership structure less favourably. 

DBNGP is one of DUET’s four Australian subsidiaries, and owns the 1,489km main pipeline and 339km of lateral pipelines that link the North West shelf gas fields with the main population and industrial centres in Western Australia. Moody’s does not expect any immediate impact on DBNGP ratings from the proposed acquisition, and considers a near to medium term upgrade to be unlikely due to its high financial leverage and the commodity exposures of its counterparties. Longer term, Moody’s ratings will depend on the new owners’ decisions around DBNGP’s capital structure and their attitude to gearing. Moody’s sees the current investment grade rating as being underpinned by the pipeline’s strategic importance and the largely contracted nature of the firm’s volume capacity.

DUET’s proposed acquisition is expected to comprise of a cash consideration up to $3.00 per stapled security payable by the consortium, as well as a special distribution from DUET of at least $0.03 per stapled security. The proposed $3.00 per stapled security is an improvement on the original bid of $2.90, which was received by DUET from the consortium in an unsolicited proposal late last year. Total expected cash proceeds to DUET security holders of $3.03 per security represent a 27.5% premium to the three month volume weighted average price (VWAP) of DUET’s securities, with the board recommending that security holders vote in favour of the proposed acquisition.

Implementation of the acquisition will be subject to various conditions, including the approval of DUET security holders, regulators and the courts – as well as an independent opinion that the schemes are fair, reasonable, in the best interests of security holders and would lead to no material adverse change. Subject to its conditions being met, the schemes are expected to be implemented by mid May 2017. The consortium members may also need to seek approval from their respective shareholders regarding the proposed acquisition, but this is not a condition. In the absence of the consortium members obtaining shareholder approval, CKP will proceed with the proposed acquisition.

An ASX announcement is available here.External link - opens in a new window

Note: If you are a wholesale investor and would like to see the credit ratings, please contact your local dealer.

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