On 19 November 2015 Federal Treasurer Scott Morrison confirmed that the Australian government will prohibit the sale of S. Kidman and Co Limited (Kidman) to foreign investors as it would be ‘contrary to the national interest’.
Kidman is Australia’s largest private land owner, holding approximately 1.3 percent of Australia’s total land area and 2.5 percent of Australia’s agricultural land. It has 10 cattle stations, including properties across regional South Australia, Western Australia, the Northern Territory and Queensland, covering 101,411 square kilometres. With an average herd of approximately 185,000 cattle, Kidman is one of the country’s largest beef producers.
There has been considerable interest in these assets from a number of foreign bidders over the past few months, with China’s Shanghai Pengxin Group and Genius Link Group reportedly the frontrunners with bids in the region of $350 million, however all such offers were subject to foreign investment approval by the Treasurer.
The regulatory environment
Although it was expected that these bids would be scrutinised closely, the decision has come as a surprise to many who were expecting that the government would relax its attitude to foreign investment under Prime Minister Malcolm Turnbull and Treasurer Scott Morison. It is also surprising because the government has traditionally been reluctant to prohibit foreign investment other than in the context of recognised sensitive sectors such as residential real estate. In fact, there have been just a handful of rejections of commercial transactions in the past 15 years, with the latest being the prohibition of Archer Daniels Midland’s proposed acquisition of Graincorp in late 2013.
More commonly in these situations, the Foreign Investment Review Board (FIRB) will negotiate with a foreign investor (or impose conditions on any approval) to ensure that the terms of the proposed acquisition are not seen to be contrary to the national interest.
The decision is consistent with the government’s increasing recognition of agriculture as a sensitive sector within the Australian economy. Previously foreign investors were only required to notify the FIRB of proposed acquisitions of agricultural land for transactions valued at $252 million (or more). However, the increased focus on the agriculture sector has recently seen the $252 million threshold for review by the FIRB of proposed acquisitions of agricultural land by foreign investors reduced to $15 million (aggregate value). Stricter notification and approval requirements have also been introduced for foreign investment in agribusinesses (i.e. non land agricultural assets). Legislation has also recently been passed to set up a register of foreign holdings of agricultural land.
All of these factors indicate that although the government maintains its public message of being ‘open for business’, it is growing increasingly cautious about ‘selling the farm’.
The decision and its implications
As with all decisions under the foreign investment rules, the decision to prohibit the sale of Kidman was made on the basis of what was considered to be ‘contrary to the national interest’. This required an analysis of all the facts and circumstances. In the current scenario there were a number of factors that would have counted against the proposed acquisition. For starters, a large part of one of Kidman’s stations, Anna Creek, is located in the Woomera Prohibited Area (WPA) in South Australia, which obviously raises national security concerns. National security is a hot topic at the moment, not least due to the recent decision to allow a long-term lease of the Port of Darwin to a Chinese company with alleged links to the People’s Liberation Army.
That said, Mr Morrison confirmed that the federal government’s refusal to approve the acquisition was based not only on the national security issues relating to access to the WPA but also the “size and significance” of Kidman’s property portfolio. Clearly a proposal by a foreign investor to acquire a 100% interest in such a significant Australian landholder and food producer, which would have involved control of those assets passing offshore, would also have raised issues of food (and water) security.
This decision comes at a time of significant change to Australia’s foreign investment regulatory environment. From 1 December 2015, it is expected that significant fees will be imposed on applications for FIRB approval. Under the new rules, a transaction of this size would be subject to a $100,000, non refundable fee payable by each of the bidders. This, combined with the very public nature of the decision to reject the application in the current circumstances, is likely to discourage other foreign investors seeking to invest in the Australian agriculture sector.
For large aggregated landholdings such as Kidman, the price tag inevitably means the list of potential buyers will include (or be dominated by) foreign investors. There will undoubtedly be concern amongst those wishing to realise the value of such holdings that the buyer pool has just been reduced or discouraged in a way that sees any premium for having operations of scale is reduced or eliminated. Whether the government’s decision results in a negative impact on rural land valuations remains to be seen.