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Regulators give go-ahead to APA-Envestra merger

Regulator haters can breathe a sigh of relief. APA Group (ASX: APA) announced today that the Australian Competition and Consumer Commission (ACCC) has confirmed it will not say no to an all-share merger between APA and Envestra  (ASX: ENV).

The proposal was first announced by APA on July 16, and was seen by the company as a logical next step in APA’s growing investment in natural gas distribution company Envestra. APA first acquired a 17.2% chunk of Envestra in 2007, upping ownership to 33% over the last six years.

Although Envestra has continued to own its pipeline networks serving around 1.2 million Aussies, a long-term agreement already puts APA in charge of management and day-to-day operations of Envestra’s assets.

The $2 billion offer (around 1.4 times assets) hasn’t been without its hiccups, however. Earlier this month, APA released a statement noting that it was “surprised” that an Envestra committee had rejected APA’s merger proposition “without any discussion” with APA.

Foolish takeaway

Envestra’s response that APA’s offer “significantly undervalues” its corporation shouldn’t change based on regulatory approvals – but it might. A lengthy regulatory battle is hardly ever in the interest of shareholders, and the ACCC’s open arms could just be enough to tip the scales on APA’s initial offer.

The main difference between APA’s and Envestra’s valuation comes down to book value versus future expectations. APA’s 1.4 times asset offer adds in some expectations for a profit-pulling future natural gas network, but Envestra’s not convinced. Mr. Market’s share price for the natural gas company put APA’s proposition at less than a 1% premium for shareholders at the time, and Envestra shares have continued to head higher in the last couple weeks.

Regulators may not be a barrier to a merger, but it’s looking increasingly like APA may need to back its offer with a few more bucks before Envestra’s really interested.

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Motley Fool contributor Justin Loiseau has no position in any stocks mentioned in this article. You can follow him on Twitter @TMFJLo.

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