DUET-Cheung Kong deal to test Australia's foreign investment regime

By Jamie Freed and Donny Kwok

SYDNEY/HONG KONG (Reuters) - DUET Group has agreed to recommend an increased $5.51 billion bid from a consortium led by Cheung Kong Infrastructure Holdings, in a deal that is likely to test Australia's appetite for foreign investment in its key energy assets.

In what is seen as an increasingly protectionist stance, Australia has been thwarting attempts by foreign investors to buy strategic assets in the country. Recently, it blocked a bid by Hong Kong's Cheung Kong Infrastructure (CKI) to buy state-owned firm Ausgrid on national interest grounds.

Australia has since imposed limits on foreign ownership in the sales process for a smaller power grid, Endeavour Energy, as sensitive assets such as ports and energy grids come under increased scrutiny.

CKI's latest bid to buy DUET for A$3.03 a share - up A$0.03 from an earlier offer - remains subject to approval from the Foreign Investment Review Board (FIRB), but the Hong Kong firm said it was confident of obtaining clearance.

"We are encouraged by many...statements by senior officials in Australia saying Ausgrid situation was unique and did not set any precedent and should not be a consideration in FIRB's future approach to foreign investment," CKI Deputy Managing Director Andrew Hunter told media during a conference call on Monday.

DUET's board has decided to recommend CKI's A$7.37 billion offer in the absence of a higher bid.

John Pearce, the chief investment officer of DUET's largest shareholder, UniSuper, which has a 15.6 percent stake, said in a statement that he was "comfortable" with the board's decision.

Shares in the Australian energy firm rose more than 5 percent to just below CKI's per-share offer price on Monday.

"It is a very high valuation for DUET," RBC Capital Markets analyst Paul Johnston said, adding it equated to 1.6 times DUET's regulated asset base. "The market is now focused on FIRB. The assets of DUET are less sensitive (than Ausgrid) I think from a national security point of view."

DUET's assets include a gas pipeline in Western Australia as well as suburban power grids that are smaller than Ausgrid's, the network for Australia's largest city, Sydney.

CKI said the DUET deal would be done through a consortium that also included related companies Cheung Kong Property Holdings, CK Hutchison Holdings and Power Asset Holdings.

DUET Chairman Doug Halley said the company believed the offer fully recognised the value and future growth platform the management team had created as well as the operating and financing cost savings available to the CKI-led consortium.

In a report issued on Dec. 5, Morningstar analyst Jennifer Song said the value accretion available to CKI from its bid was poised to come primarily from lower debt costs.

($1 = 1.3382 Australian dollars)

(Reporting by Jamie Freed in Sydney and Donny Kwok in Hong Kong; Editing by Phil Berlowitz and Himani Sarkar)