Regulator deals blow to Brookfield’s Asciano bid

Australia's Competition Commission is considering a rival offer by Qube, GIP and CPPIB for the $6.5bn business after sending Brookfiled back to the drawing board.

Brookfield Infrastructure Partners (BIP) has to work harder at convincing Australia’s regulator that its bid to acquire rail and port operator Asciano will not choke competition in the sector.

On Wednesday, the Australian Competition and Consumer Commission (ACCC) rejected the measures the Canadian fund manager proposed to address competition concerns.

“After detailed consideration, the ACCC has concluded that the undertakings are not acceptable, and accordingly we will not be conducting third-party consultation on the undertakings,” Rod Sims, the Commission’s chairman, said in a statement.

Brookfield is in consultation with Asciano on assessing the announcement and evaluating available alternatives for addressing the regulator’s concerns, “including the provision of new structural undertakings,” the Canadian fund manager said in a separate statement.

Section 87b of Australia’s Competition and Consumer Act of 2010 allows a company to submit either behavioural or structural undertakings or remedies if the ACCC raises competition concerns in connection with a potential merger or acquisition.

The Commission’s rejection of Brookfield’s behavioural undertakings – ongoing remedies designed to modify or constrain the behavior of the merged firms – should not come as a surprise. In its Merger Guidelines, the ACCC states it “has a strong preference for structural undertakings,” with divestiture being the most common form of structural remedy accepted.

The ACCC voiced its concerns in connection with Brookfield’s bid for Asciano on October 15, 2015, stating that the vertical integration resulting from the proposed acquisition is likely to lead to a substantial lessening of competition in markets for the supply of above-rail haulage services in Western Australia and Queensland.

Should the proposed acquisition be realised, Brookfield would own Asciano’s Pacific National above-rail business, which operates on Brookfield’s rail network in Western Australia. Pacific National also transports coal to Darlymple Bay Coal Terminal, another asset Brookfield operates under a long-term agreement.

Despite its rejection of the proposed remedies, the ACCC has not yet made a final decision on the proposed acquisition. It is expected to do so on December 17.

In the meantime, however, it has begun market inquiries into the non-binding proposal a consortium led by Australian logistics firm Qube Holdings submitted earlier this month. The A$9 billion (€6.1 billion; $6.5 billion) bid submitted by the Qube consortium – which also includes New York-based Global Infrastructure Partners (GIP) and the Canada Pension Plan Investment Board (CPPIB) – is only slightly higher than Brookfield’s but has much less of a regulatory hurdle to overcome.

Brookfield and GIP declined to comment.

The ACCC has said it will make its decision on the Qube proposal on February 11, 2016. 

In its own statement, the Qube-led consortium confirmed it has made a formal submission to the ACCC regarding its proposal for Asciano. It has been granted due-diligence access to Asciano, a process it expects to complete by mid-December.

The pursuit of Asciano has become increasingly competitive since Brookfield – in partnership with the British Columbia Investment Management Corporation (bcIMC) and Singapore’s sovereign wealth fund GIC – first announced plans to acquire the company in August.

On October 30, Qube joined forces with GIP and CPPIB to acquire a 19.99 percent stake in Asciano, which industry observers at the time rightly interpreted as a move to block Brookfield's offer.

A week later, Brookfield built up its position in the company, acquiring a 19.2 percent stake for a total of $1.2 billion.

Asciano, however, continues to “unanimously recommend” the Brookfield proposal that was announced on November 9, “in the absence of any superior proposal capable of acceptance.”

Qube, in Wednesday's statement, urged Asciano shareholders not to take any action in relation to Brookfield's offer. “In particular, Asciano shareholders should note that by accepting the Brookfield offer, even while it remains conditional, they could be prevented from accepting any alternative, superior proposal put forward by the [Qube] consortium,” it said.

The competition over Asciano comes at a time when both GIP and Brookfield are in the market seeking to raise $10 billion and $12.5 billion, respectively, for their latest infrastructure funds.