Hong Kong-based CK Infrastructure Holdings Ltd., a company backed by one of Asia’s wealthiest families, bid $12.4-billion for Inter Pipeline Ltd. this summer, only to see the Calgary-based utility spurn the takeover for reasons that include perceived political risks.
CK Infrastructure, a public company controlled by billionaire Li Ka-shing, pitched a friendly cash offer of $30 a share at Inter Pipeline in July, a 30-per-cent premium to where the company’s stock was trading at the time, according to sources familiar with the two companies. The Globe and Mail is keeping the sources’ names confidential because they were not authorized to speak publicly on the matter.
The Globe reported on the offer in early August, but not the identity of the bidder. In response to a request from regulators, the Canadian utility put out a press release last month that said: “Inter Pipeline confirms that it received an unsolicited, non-binding, conditional and indicative proposal to purchase the company but it is not in negotiations with any third party.”
Several analysts and bankers said the language in Inter Pipeline’s press release, which refers to a “conditional” proposal, might point to an offer that was only valid if it receives government approval in Canada. The Globe is keeping the names of the bankers and analysts confidential because they were not authorized by their employers to speak on the record.
The two countries are currently at odds over the arrest last December of Huawei Technologies Co. Ltd. chief financial officer Meng Wanzhou in Vancouver and subsequent detention of two Canadians in China, and there is a bitter trade war playing out between China and the United States. The analysts and bankers said Inter Pipeline’s directors, working with lawyers and financial advisers, decided not to open talks with CK Infrastructure because they did not believe they could close the deal.
Both CK Infrastructure and Inter Pipeline declined to comment on Thursday. One of the sources familiar with the two companies said CK Infrastructure remains interested in bidding for the Canadian company. They also say Inter Pipeline would hold a full-scale auction of the company if they do decide to sell it, rather than only negotiating with CK Infrastructure.
Inter Pipeline carries oil from Alberta’s oil sands to major export pipelines and has a large natural gas liquids processing operation. It also has a network of bulk fuel terminals in Europe, which it is currently trying to sell. The company is developing a $3.5-billion petrochemical plant near Edmonton, called Heartland, that has stretched its finances.
The cost of funding Heartland − the company may have to issue equity or take on a larger debt burden to complete it − had depressed Inter Pipeline’s stock price, according to analysts. The analysts said Inter Pipeline’s board may have turned down CK Infrastructure’s overtures because the company wants to finish Heartland and see its value reflected in the share price prior to entertaining takeover talks.
CK Infrastructure already owns significant businesses in Canada, including a stake in 2,200 kilometres of oil pipelines and a water heater business with 1.7 million customers. At one time, Mr. Li was the largest single shareholder in Canadian Imperial Bank of Commerce. His son Victor Li, aged 55, is chairman of CK Infrastructure and a Canadian citizen. CK Infrastructure has a $24-billion market capitalization and invests around the world.
However, governments have blocked takeover offers from the Li family’s company for what they deem as essential infrastructure. Last November, the Australian government blocked a friendly, US$9.4-billion bid for natural gas pipeline owner APA Group from a consortium led by CK Infrastructure. The Australian government ruled the takeover was “contrary to the national interest.” APA brings energy to more than 70 per cent of the population of New South Wales and Victoria, Australia’s most populous states.
In addition to its Canadian infrastructure holdings, the Li family controls Calgary-based Husky Energy Inc., which abandoned a $3.3-billion hostile takeover of MEG Energy Corp. in January. The decision to walk away from what seemed a winning bid confounded many oil-patch investors. Several analysts said the experience at MEG could have led the Inter Pipeline board to question the Li family’s ability to complete a difficult merger. Walking away from MEG proved a sound business decision for Husky. Shares in the oil sands company are currently trading for half the price that Husky offered.
China’s state-owned companies and private business started scaling back investment in Canadian businesses three years ago, prior to the start of the trade war with U.S. President Donald Trump and Ms. Meng’s arrest. The University of Alberta tracks domestic investment by Chinese companies, and found that in 2018, the flow of Chinese capital declined by 47 per cent from the previous year to $4.43-billion, while the number of Canadian transactions in 2018 dropped by 37 per cent to 70 deals compared with 2017. The university said: “This decline can be partially explained as a consequence of the capital outflow restrictions, imposed by Beijing in 2016 and 2017.”
Editor’s note: (Sept. 5, 2019) An earlier version of this story incorrectly suggested a recent purchase offer for Inter Pipeline would only be valid if it received government approval in China.
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Andrew Willis
Jeffrey Jones