Pipeline group APA is set to be challenged by the competition watchdog on the future shape of the gas distribution industry over its planned $2 billion merger with Envestra.
The merger proposal, with APA offering shares to Envestra shareholders, follows a steep rally in APA shares and comes as it faces dwindling domestic growth options.
The latest proposal comes not long after it wrapped up the $1.4 billion acquisition of Hastings Diversified, which also ran the gauntlet of a lengthy review by the Australian Competition and Consumer Commission, and resulted in APA being forced to offload the Moomba to Adelaide pipeline.
APA is to offer 0.1678 APA shares for each Envestra share, placing a notional $1.10 value on Envestra shares and valuing the company at $1.98 billion. APA already manages Envestra's assets and holds a third of the shares on issue.
APA operates a network of long-distance gas pipelines in the eastern states, Envestra owns gas reticulation networks in Adelaide, Melbourne and Brisbane.
The ACCC said on Tuesday it was aware of the APA proposal, and it reviewed transactions that could restrict competition.
"The issue here is not the price but, rather, competition concerns," one industry observer said. "APA had a lot of drama with the ACCC with the Hastings Diversified deal.
"But this proposal looks to involve vertical integration since APA will be the hauler of the wholesale gas as well as the provider to the retailer."
Despite the wariness in some parts of the industry, APA was optimistic the ACCC would not oppose the deal.
"There are no competition issues that would cause concern for the ACCC with this transaction," managing director Mick McCormack said.
The high level of capital demands by Envestra over the next few years meant that a full merger of the two groups made sense at this point.
"The bigger the business the better the access to international capital markets. This is a very capital-intensive business," Mr McCormack said. Envestra recently raised $160 million in fresh equity and has a $1.3 billion capital spend over the next few years that will need to be funded.
APA already has a one-third interest in Envestra and manages its gas network, which spans the eastern states and supplies 1.2 million gas consumers.
The merger will see South Australia lose the headquarters of another listed entity, with APA planning to merge all head office functions directly into its own unit in Sydney if the deal is consummated.
Envestra shares rallied 6.5¢ to close at 112.5¢, finishing slightly higher than their notional value under the takeover terms. APA shares fell 15¢ to $6.23.