Regulatory hurdles complicate Asciano deal

The Australian competition commission’s postponement of a final decision on Brookfield’s takeover offer for Asciano, at the request of the Canadian fund manager, buys time for rival Qube-led consortium.

An ongoing bidding war for Australian port operator Asciano looks set to intensify after the Australian regulator indefinitely postponed its final decision on  Brookfield  Infrastructure's $6.3 billion offer for the business.

The Australian Competition and Consumer Commission (ACCC) in October expressed concerns that the vertical integration resulting from Brookfield's proposed acquisition of Asciano would lead to a substantial lessening of competition in markets for the supply of above-rail haulage services in Western Australia and Queensland.

By acquiring Asciano, Brookfield – which is partnering with the British Columbia Investment Management Corporation and Singapore's sovereign wealth fund GIC  – 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.

The ACCC was due to issue a final decision last Thursday regarding Brookfield's offer. However, a few days before the decision was expected, the regulator said the “former proposed decision date of 17 December 2015 [has been] delayed at the request of Brookfield,” adding that a new decision date will be announced in due course.

According to reports that Brookfield would neither confirm nor deny, the delay is the result of the Canadian firm submitting “structural undertakings” for the ACCC to review before making a final decision.

Structural undertakings or remedies usually include divestitures a potential acquirer commits to in order to address competition concerns. According to the ACCC's Merger Guidelines, they are preferable to behavioural undertakings, which are designed to modify or constrain the behaviour of the merged firms.

On 25 November, the ACCC rejected Brookfield's behavioural undertakings, calling them “unacceptable.”

The latest development in the Asciano saga means Brookfield, which first announced its intention to acquire the business in August, has lost the head-start it had over a consortium led by Australian logistics firm Qube Holdings, also vying for Asciano.

Despite the ACCC's pending decision, Brookfield officially opened its takeover proposal on 11December, giving Asciano shareholders 30 days to accept or reject the offer.

While Asciano's board has consistently recommended that the company's shareholders accept the Brookfield offer “in the absence of any superior proposal capable of acceptance,” independent corporate advisor Grant Samuel & Associates recommends that Asciano's shareholders wait until matters such as the ACCC's concerns are resolved or clarified before making a final decision.

Further complicating matters is the non-binding proposal Qube and its partners – New York-based Global Infrastructure Partners (GIP) and the Canada Pension Plan Investment Board (CPPIB) – submitted on 10 November for Asciano. The ACCC has begun an informal review of the Qube proposal and is expected to announce a decision on 18 February 2016.

However, the Qube consortium could submit a binding proposal before the ACCC issues its decision. On 16 November, Asciano's board granted the Qube consortium access to confirmatory due diligence, which the group was expected to complete in mid-December. As of Monday, no official statement had been issued. A spokesperson for GIP declined to comment.

While Qube's indicative offer of A$9.25 (€6.09; $6.62) per share is only slightly higher in value than Brookfield's offer of A$9.22 per share, it faces much less of a regulatory hurdle since Asciano would be carved out among the three partners, with GIP and CPPIB acquiring Pacific National and Qube acquiring the container terminal business of Patrick T&L. Qube would not acquire the interest in the Australian Container Freight Services (ACFS) joint venture and only a 50 percent interest in the Bulk & Automotive Port Services' (BAPS) Australian Amalgamated Terminals (AAT) joint venture. BAPS' remaining 50 percent interest and the ACFS interest would be sold.

The pursuit of Asciano has grown increasingly complicated since Brookfield first announced its intentions to acquire the company in August under a scheme of arrangement. According to a guide compiled by Australian law firm Ashurst, a scheme “is a court approved arrangement between the target company and its shareholders for the transfer or cancellation of their shares in exchange for cash and/or shares of the acquirer. The arrangement must be approved at a meeting of target shareholders.”

The shareholder meeting which was scheduled for mid-November was postponed indefinitely when in October, Qube, GIP and CPPIB emerged as rivals acquiring a 19.99 percent stake in Asciano. This was followed by a similar counter-move by Brookfield which acquired a 19.2 percent stake in the Australian company for a total of $1.2 billion.

With the Qube-led consortium acquiring a nearly 20 percent stake in Asciano it would be able to block Brookfield's scheme of arrangement, which led to the Canadian firm's subsequent takeover bid.

According to one legal expert not involved in the transaction, should the ACCC decide against the Brookfield proposal, the Canadian fund manager and its partners would have the option of presenting their case to the Australian Competition Tribunal.

Asciano's port and rail assets in Australia include container terminal operations in cities including Sydney, Melbourne, Brisbane and Perth, with a capacity of approximately 4.9 million TEUs (20 foot equivalent units) as well as port, terminal and supply chain services supporting shipping lines, importers, exporters, freight forwarders and customs brokers.

It also oversees nationwide rail haulage operations comprising 664 locomotives and over 14,000 wagons with the capacity to haul 180 million tons of freight diversified across mineral and bulk haulage, steel and intermodal.