No-moat Duet Group received an unsolicited non binding indicative takeover proposal of AUD 3.00 per security in cash from Hong Kong-based Cheung Kong Infrastructure, or CKI. The proposal is subject to conditions including completion of due diligence and regulatory approval. The offer values Duet at more than 1.5 times regulated asset base (what the regulator says the assets are worth), adjusted for the unregulated Energy Developments business. This is a generous price, reflecting a 28% premium to the last closing price and a 43% premium to our prior fair value estimate. As such we believe security holders are likely to support the offer.
However, while CKI is not a state-owned enterprise and already owns gas and electricity distribution networks in Australia, the bid could be rejected by the government considering CKI's recent bid for Ausgrid was blocked. We believe there's a roughly 50% chance of Duet being successfully taken over, and raise our fair value estimate to halfway between our DCF-based valuation of AUD 2.10 and the indicative bid price. Our new fair value estimate is AUD 2.55 per security. We would be highly likely to recommend a formal cash bid at AUD 3.00 per security, or selling on market if the share price trades around that level. Even at current levels around AUD 2.70, investors may want to reduce their exposure given a takeover is not certain and the share price is well above our underlying valuation. Duet is currently evaluating the proposal.
Analyst: Adrian Atkins
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