The Australian Council of Trade Unions’ warning came after ASX-listed Spark Infrastructure – which owns a 49% stake in SA Power Networks – in August accepted a takeover bid of $ 5.2 billion. dollars from a consortium of investment funds based in the United States and Canada.
The consortium is led by US private equity giant Kohlberg Kravis Roberts, in collaboration with the Ontario Teachers’ Pension Plan and the Canadian Public Sector Pension Investment Board.
The takeover bid would see all of SA Power Networks in foreign hands. The remaining 51 percent stake in South Australia’s only electricity distributor is already held by Hong Kong-based CK Infrastructure Holdings.
In a letter to Treasurer Josh Frydenberg earlier this month, CUTA Deputy Secretary Scott Connolly said the labor movement was “gravely concerned” over the “growing treatment of critical Australian infrastructure assets acquired. by foreign investors “.
“The potential acquisition would be one of the largest and most impactful infrastructure purchases in Australia in years,” Connolly wrote on October 5.
“It would be bought by Canadian pension funds, but KKR’s reputation as an asset owner poses a risk to Australians who depend on the electricity supplied by Spark’s subsidiaries and the workers serving those customers.
“KKR has a turbulent history where they pull out valuable assets to make a very quick comeback. “
Connolly pointed to KKR’s involvement in the leveraged buyouts of former US retail giant Toys R Us and food / tobacco company RJR Nabisco as evidence of the “private equity firm notes.” in terms of operating assets and extracting as much profit from them as they can. ”.
Toys R Us went bankrupt in 2017 seven years after being bought out for $ 6.6 billion by three private equity funds – including KKR – and struggling with more than $ 5 billion in debt.
RJR Nabisco also found himself with mountains of debt and cut thousands of jobs following a $ 25 billion leveraged buyout of KKR in 1988 – depicted in the book and movie Barbarians at the door.
“This is their model: they come in, buy an asset, take it apart and move on,” Connolly said. Daily.
“They don’t apologize to their investors, it’s their promise that they will get a 20 to 30% return on their investments.
“The problem, of course, with critical infrastructure like the power supply is that it’s heavily regulated, requiring significant and ongoing capital expenditures on the part of owners… and all kinds of things. reduction or erosion of the supply of capital could certainly have a negative impact on sustainability. and long-term energy supply to consumers.
“We recognize that they are in partnership with a different kind of investor – Ontario teachers and public sector pension plans, both long-term Canadian investors – but we still believe there is a concern that justifies the treasurer’s exercise of discretion over this important piece of state infrastructure in South Australia.
Connolly said he was concerned about what condition SA Power Networks might be in if KKR chose to sell its stake within 10 years of its acquisition, speculating that the subsequent owners “may well be the state or another large investor because ‘he was so roughed up “.
But a spokesperson for KKR said the company has been investing in Australia for over 15 years and “takes our role as a responsible investor seriously.”
“We pride ourselves on our track record of supporting the long-term success and growth of businesses – including those operating in and around South Australia – by investing in their research and development, employee programs. , their governance procedures, their products and their resources, ”said the spokesperson.
“We have seen businesses and employees thrive and customers benefit from the growth of those businesses. “
The US private equity firm already owns the cookie makers Arnott’s and its Marleston manufacturing facility; Australian Venue Co, which owns seven pubs in South Africa; and cancer and cardiac service provider GenesisCare, which operates 11 centers in South Africa.
“KKR welcomes the opportunity to be an investor in Spark Infrastructure and fully intends to positively engage with the management team and employees of the company to help Spark seize the opportunities to provide services to customers and communities across Australia, ”the spokesperson said.
KKR’s takeover bid for Spark Infrastructure will also allow them to take a 49% stake in Victoria’s two electricity distributors, PowerCor and CitiPower, and a 15% stake in TransGrid, the company responsible for the New South Wales part of the SA of $ 2.28 billion. -NSW interconnector.
Victorian Energy Policy Center director Bruce Mountain said that while he understands the union’s concerns about the potential of the South Australian electricity distributor’s “unscrupulous” private equity management, he believes that KKR’s influence over SA Power Networks will be limited as a minority owner.
“He’s a 49% shareholder, he doesn’t have a majority – the majority is with CKI which is basically private equity,” he said.
“I can understand why [the union] raised their concern, but it is not clear to me that this particular example is a good example.
Mountain said he is more concerned that information about SA Power Networks will no longer be publicly available if Spark ends up in foreign hands.
“If you were to try to unravel what’s really going on in SA Power Networks through CKI, it’s impossible – I tried,” he said.
“The only way to access it is from… Spark’s list, so you can at least see what’s going on to some extent.
“I think the loss… is the loss of the stock market listing, and with this provision of information that is so invaluable in understanding what is going on with these companies.”
Based on the $ 5.2 billion valuation of Spark Infrastructure by the KKR-led consortium, Mountain calculated last month that the Australian Energy Regulator set retail prices for Spark’s distribution services 53 percent higher than necessary.
Mountain said it was only able to make the calculation based on the information that Spark Infrastructure provided to ASX.
“You can’t do that when they’re no longer listed,” he said.
“This information is really valuable in evaluating the regulatory regime, and in my case speaking out against what I said was a failure in effectively failing to consider the evidence that investors value these companies – [and] are willing to provide capital to these companies – at a much lower cost than assumed by the energy regulator.
“[KKR will] must report the balance sheet and income statement to ASX in the usual way … but you will not be able to get a valuation, market valuation, equity or takeover valuation of the company.
“I cannot quantify the impact on prices, but it will be the customers who will continue to pay a lot more than they should. “
The purchase of Spark Infrastructure is still subject to the approval of the Foreign Investment Review Board.
SA Power Networks chief operating officer Paul Roberts said the electricity distributor would remain a regulated “independent of ownership” distribution service provider.
“Our expenses and revenues for the maintenance of the SA distribution network are approved by the Australian Energy Regulator and we will continue to meet our regulated customer service obligations,” he said.
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