The duo of Australia’s billionaire tech investor Mike Cannon-Brookes and Canada’s infrastructure giant Brookfield have broken the mould with their $5 billion offer for troubled energy operator AGL. Rarely do corporate predators take on the image of environmental superheroes.
Convention says takeovers are first, second and third about money – that is the currency of success.
This offer, however, is marketed as environmental salvation for AGL, its shareholders and Australia’s sovereign climate bona fides as first, second and third-order issues.
The bidder’s promise of removing two of the country’s largest coal-fired power plants decades ahead of time and investing between $10 billion and $20 billion in renewables to replenish the grid is compelling stuff – albeit a little light on detail.
And the bidders display a mastery of timing – pitching the offer as we come up to a federal election in which climate change has become a wedge issue and only days after another large energy company, Origin, announced the early closure of its large remaining coal-fired generator.
Retail shareholders will experience moral suasion and the large super funds will need to back up the decarbonisation leadership rhetoric they have so earnestly espoused for the past couple of years.
The price the consortium is offering isn’t the big attraction – with a relatively small premium to AGL’s prevailing share price. At this point ‘Team Cannon-Brookes/Brookfield’ hasn’t put enough on the table to gain the support of the AGL board or its shareholders.
And not surprisingly, the consortium has been quickly dispatched by the AGL board, which took less than a weekend to determine the offer was a lowball one.
But that’s the way takeover offers work these days – rarely does a suitor put its best price forward at the start. Monday marks the beginning of a negotiation process – and the assessment of the relative leverage held by the buyer and target.
The share price immediately overtook the bid price on Monday – which suggests the market understands the bidder has more in the tank.
The combined capital firepower of Brookfield and Cannon-Brookes is huge – enough to swallow the 180- year-old AGL several times over.
Indeed, both Brookfield and Cannon-Brookes had been investigating a run at AGL separately and ‘bumped into each other’ in the process and decided to team up.
It plays well into the international playbook of tech gurus supporting the environment and so it ticks the box for Cannon-Brookes, who has clearly been looking for a project that backs his environment crusade.
Renewables are the cheapest form of energy on the planet and continue to get cheaper every year.
Just how the $5 billion-plus cost of buying AGL or the $20 billion cost of investing in wind farms and batteries would be divided between Cannon-Brookes and Brookfield remains a secret.
Although Brookfield’s regional head of Asia Pacific, Stewart Upson, told this masthead that both Brookfield and Cannon-Brookes were significant shareholders.
The consortium understands that the offer price put before AGL doesn’t have to be wildly generous – it just needs to be more compelling than AGL’s alternative, which is to break up the company through a demerger. If the demerger proceeds AGL shareholders get shares in the two separate AGL companies which will be born from this process.
One of these companies will hold mostly AGL’s retail energy assets and the other its mainly coal-fired power plants.
The good news for Cannon-Brookes and Brookfield is that AGL shareholders are not strongly supportive of the demerger – and are wary of the longer-term value of the energy generating company and heavy emitting baseload energy producing company – which is to be renamed Accel Energy.
AGL’s power plants account for an estimated 8 per cent of Australia’s greenhouse gas emissions.Credit:Paul Jones
Cannon-Brookes has questioned whether Accel would be able to raise the capital needed to transition into green energy and “has an extraordinarily uncertain future”.
He says that without the capital to fund that transition, “I would argue the demerged entity will create more instability and higher prices. There is no way I can see that it will create lower prices”.
He argues that without investment the old coal plants will become less reliable and less economically viable. On that basis, he says it is hard to see how the value of Accel is higher than the value that is implicit in the offer for AGL.
Cannon-Brookes, who is no stranger to disagreeing with the government, adds the Prime Minister needs to be questioned on why he thinks sweating the coal plants for the remainder of their scheduled life would add to the reliability of power generation or the price of electricity.
The fact is we have the lowest prices of retail energy in eight years, which Cannon-Brookes says is down to the increasing penetration of renewables. “Renewables are the cheapest form of energy on the planet and continue to get cheaper every year,” he says.
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