Deals

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

Is Hong Kong's richest man trying to imitate his fictional namesake?

Li Ka-shing, known as Superman in Hong Kong for his dealmaking prowess, has investments that circle the Earth. But he'll need to turn back time if he wants to get his hands on Duet Group, an Australian infrastructure business with gas and electricity distribution assets around Melbourne and in the country's west.

Not So Boring
CK Infrastructure's A$3-per-security offer for Duet Group has sent the shares to an eight-year high
Source: Bloomberg

Duet shares soared as much as 20 percent to an eight-year high of A$2.82 after the company confirmed the A$3-per-share approach Monday. But getting the deal away will be no easy task: It's less than four months since Li's Cheung Kong Infrastructure Holdings Ltd. was rebuffed in its attempt to buy a majority stake in Ausgrid, a government-owned electricity distributor in Sydney.

Gadfly has previously argued that the Ausgrid decision, which cited "national security requirements", was wrong-headed, representing a volte-face for a government that was previously quite open to overseas utilities investors. CK Infrastructure already owns a swath of gas and electricity distribution networks in South Australia and Victoria states, while China's government-owned State Grid Corp. has an indirect minority stake in Duet's United Energy electricity network.

Nevertheless, having blocked CK Infrastructure's involvement in that deal, it's difficult to see how Australian Treasurer Scott Morrison can now wave through such a similar transaction without getting egg on his face.

The bigger issue with Duet is not foreign control of key infrastructure, but the way the company is structured to minimize tax payments.

Duet corporate structure

In common with many of the country's infrastructure businesses and real estate investment trusts, Duet is a so-called stapled security group -- four companies bound together by contracts that trade as one on the Australian Securities Exchange.

The result of that complex arrangement is what locals would call a Magic Pudding -- a business that keeps handing out goodies in excess of its apparent capacity to supply them. Duet's consolidated profits before tax have come to just A$476 million ($354 million) over the past five years, but it's returned A$1.01 billion to investors in the form of cash distributions to holders.

Magic Pudding
Duet Group has consistently paid out more money to investors than it's made in pretax income
Source: Company reports

The half that's not coming out of group income as dividends has come in the form of distributions from DUET Finance Trust, a lender to United Energy and a minority shareholder in the Western Australian pipeline that is Duet's other major asset.

The Li family is very familiar with the stapled-security structure. CK Infrastructure's first investment outside of China and Hong Kong was Envestra, an Australian stapled natural gas distributor in which it bought a stake in 1999 and now owns outright. HK Electric Investments Ltd., the CK Hutchison Group affiliate that provides power in the territory, is a stapled company, as is HKT Trust, the Hong Kong-based phone operator that counts Li Ka-shing's son Richard as chairman.

Borrowed Glory
Most of Duet's payments to shareholders come by way of the group's finance arm
Source: Company reports

There's nothing illegal about such stapled structures, which are set up in plain sight and with careful adherence to the law -- but they represent an outrageously good deal for investors at the expense of taxpayers. Duet Group, despite its A$1 billion in distributions over the past five years, has managed to receive an aggregate tax benefit from Australia's Treasury of A$44 million thanks largely to losses at its operating company.

If Morrison is looking for secret weapon to block Superman's latest deal, that -- rather than trumped-up national security fears -- would be a much more effective kryptonite.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net