The Australian Council of Trade Unions warning came after ASX-listed Spark Infrastructure – holders of a 49 per cent stake in SA Power Networks – in August agreed to a $5.2 billion takeover bid from a consortium of US and Canadian-based investment funds.
The consortium is led by US private equity giant Kohlberg Kravis Roberts in conjunction 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 per cent stake in South Australia’s sole electricity distributor is already held by Hong Kong-based CK Infrastructure Holdings.
In a letter to Treasurer Josh Frydenberg earlier this month, ACTU assistant secretary Scott Connolly said the union movement has “serious concerns” with the “increasing treatment of critical Australian infrastructure assets being acquired by foreign investors”.
“The potential acquisition would be one of the largest and most impactful infrastructure purchases in Australia for years,” Connolly wrote on October 5.
“It would be purchased by Canadian pension funds, however the reputation of KKR as an asset owner represents a risk for Australians relying on electricity supplied by Spark subsidiaries and the workers servicing those customers.
“KKR have a chequered history where they strip assets of value to make a very quick return.”
Connolly pointed to KKR’s involvement in the leveraged buyouts of former US retail giant Toys R Us and food products/tobacco company RJR Nabisco as evidence of the private equity firm’s “track record of sweating assets and extracting as much profit out of them that they possibly can”.
Toys R Us went bankrupt in 2017 seven years after it was bought out for $US6.6 billion by three private equity funds – one of which was KKR – and saddled with more than $US5 billion in debt.
RJR Nabisco was also left with mountains of debt and shed thousands of jobs following a $US25 billion leveraged buyout from KKR in 1988 – depicted in the book and movie Barbarians at the Gate.
“That’s their model: they come in, buy an asset, strip it down and move on,” Connolly told InDaily.
“They make no apology to their investors, that’s their promise they’ll get 20, 30 per cent returns on their investments.
“The concern of course with critical infrastructure like energy supply is that they are significantly regulated, they require significant and ongoing capital expenditure on behalf of the owners … and any sort of cut or erosion of capital supply could certainly have a negative impact on the sustainability and long-term supply of energy to consumers.
“We acknowledge they’re in partnership with a different sort of investor – the Ontario teachers and public sector pension plans, both Canadian longer-term investors – but we still think that there’s a concern that warrants the treasurer exercising his discretion about this important piece of the state’s infrastructure in South Australia.”
Connolly said he feared what condition SA Power Networks could be in if KKR chooses to sell its stake within 10 years of acquiring it, speculating the subsequent owners “might well have to be the state or another significant investor because it’s been run down so badly”.
But a spokesperson for KKR said the firm had been investing in Australia for more than 15 years and “take our role as a responsible investor seriously”.
“We are proud of our track record of supporting the long-term success and growth of companies – including those that operate in and around South Australia – through investing in their research and development, employee programmes, governance procedures, and products and resources,” the spokesperson said.
“We have seen companies and employees prosper and customers benefit through the growth of these businesses.”
The US private equity firm already owns biscuit manufacturers Arnott’s and its Marleston manufacturing plant; Australian Venue Co, which owns seven pubs across SA; and cancer and cardiac services provider GenesisCare, which operates 11 centres in SA.
“KKR welcomes the opportunity to be an investor in Spark Infrastructure and fully intends to positively engage with the company’s management team and employees to help Spark pursue opportunities to deliver electricity services to customers and communities across Australia,” the spokesperson said.
KKR’s takeover bid for Spark Infrastructure will also see them take a 49 per cent stake in Victoria’s two electricity distributors, PowerCor and CitiPower, and a 15 per cent ownership share of TransGrid – the company responsible for the New South Wales portion of the $2.28 billion SA-NSW interconnector.
Victorian Energy Policy Centre director Bruce Mountain said while he understands the union’s concerns about the potential for “unscrupulous” private equity management of South Australia’s electricity distributor, he believes KKR’s influence over SA Power Networks will be limited as a minority owner.
“It’s a 49 per cent shareholder, it doesn’t have a majority – the majority is with CKI which is essentially private equity,” he said.
“I can understand why [the union] raised their concern but it’s not obvious to me that this particular example is a good one.”
Mountain said he was more concerned information about SA Power Networks will no longer be publicly available if Spark ends up in foreign hands.
“If you were to try to untangle what’s actually going on in SA Power Networks through CKI, it’s impossible – I’ve tried,” he said.
“The only way you can access it is through … Spark’s listing, so you can see at least to some degree what is going on.
“I think the loss … is the loss of stock exchange listing, and with that information provision that’s so valuable for understanding what’s going on with these businesses.”
Based on the KKR-led consortium’s $5.2 billion valuation of Spark Infrastructure, Mountain calculated last month that the Australian Energy Regulator was setting retail prices for Spark’s distribution services 53 per cent higher than necessary.
Mountain said he was only able to make the calculation based on information provided by Spark Infrastructure to the ASX.
“You can’t do that when they’re not listed anymore,” he said.
“That information is really valuable in assessing the regulatory regime, and in my case, calling out what I said was a failure in effectively failing to account for the evidence that investors value these businesses – [and] are willing to provide capital to these businesses – far more cheaply than the energy regulator assumes.
“[KKR will] have to report balance sheet and income statement to ASX in the usual way … but you are not going to be able to get a valuation, a market valuation, of the shareholders equity or a takeover valuation of the enterprise.
“I can’t put a number on the price impact, but it’ll be customers continuing to pay far more than they should.”
Spark Infrastructure’s takeover is still subject to approval from the Foreign Investment Review Board.
SA Power Networks manager of corporate affairs Paul Roberts said the electricity distributor would remain a regulated distribution services provider “irrespective of ownership”.
“Our expenditure and revenue for maintaining SA’s distribution network is approved by the Australian Energy Regulator and we will continue to meet our regulated customer service obligations,” he said.
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