Saving the planet doesn’t come cheap: Cannon-Brookes’ tilt for AGL hits price wall

The AGL board chose the cash green over the environmental green on Monday when it rejected a revised takeover offer from Mike Cannon-Brookes and Canadian infrastructure giant Brookfield – a proposal that sought to close down coal-powered fire plants 15 years ahead of schedule and invest up to $20 billion in renewable energy.

For the board, it was a decision based on shareholder value but history will judge whether AGL played it well.

Mike Cannon-Brookes’ consortium mistimed their takeover offer for AGLCredit:AFR

For its part the consortium misjudged its takeover timing. Had it proposed this deal only five months ago when AGL’s shares were trading at 43 per cent less than they are today, the board would have had no ammunition to fight its predator.

AGL’s decision to reject the offer was arrived at using conventional takeover principles, which generally say that a takeover proposal needs to offer something in the order of a 30 per cent premium over the company’s (pre-bid) share price.

The Cannon-Brookes/Brookfield offer didn’t rise to that level of generosity when it was first tabled two weeks ago nor when it was raised to $8.25 a share over the weekend.

Thus, the prospect of Cannon-Brookes pulling off what he described as “the biggest single decarbonisation project in the world” was alive for only two weeks.

Companies that have unclear earnings, medium and longer-term growth prospects or that sit beneath some other cloud, such as being responsible for 8 per cent of the country’s emissions, are not so sought after and shouldn’t command a big asking price.

The AGL board took only two days to despatch the consortium’s revised price and brand the offer as undervaluing the business. There wasn’t even any argy-bargy about AGL giving the consortium access to due diligence.

AGL CEO Graeme Hunt will head up the Accel power generation business.Credit:Louie Douvis

AGL’s chief executive Graeme Hunt says shareholders will realise better value by sticking with the existing plan to split the company into two parts through a demerger into an energy retailer and a wholesale coal-generation provider.

The AGL board has clearly canvassed the views of its larger shareholders and understands it has the numbers to reject the Cannon-Brookes/Brookfield offer, which, in turn, has made it abundantly clear it won’t be putting a higher offer on the table.

In a perfect shareholder world, Cannon-Brookes/Brookfield would have ponied up with a price that was sufficiently generous to allow investors to cash in their shares.

And there will certainly be some AGL investors who would have preferred the company engaged more fully with Cannon-Brookes and Brookfield.

But given the $10 billion to $20 billion that was needed to transition AGL’s generation assets, a decent amount of regulatory risk and threats from the government to torpedo plans to close down the coal power stations early, the consortium had a lot to factor into its proposed price.

Brookfield and Cannon-Brookes are in business to make money.

AGL has not made a compelling case that the demerger will be a winner for shareholder value. It has only made the case that Cannon-Brookes’ offer isn’t enough.

In general, companies undertake demergers based on the theory that the sum of the parts will be more valuable than the whole.

In AGL’s case the demerger detractors believe there are financial and operational advantages to having an integrated energy company – ie a business that has wholesale and retail operations. They also argue that putting the coal generation assets into a standalone company will leave it vulnerable to being uninvestable by the growing number of super and pension funds with an increasing aversion to heavy emitters.

There remains a decent level of reservation from investors about the merits of a demerger which will be the subject of a shareholder vote in June.

AGL has been a particularly poor share price performer – in the past five years its price has fallen more than 70 per cent. It has experienced a recent reprieve as wholesale electricity prices have staged a partial recovery over the past six months.

But AGL still faces the longer-term reality that wholesale energy prices will continue to be under pressure from the flood of cheap renewables coming onto the market.

It is hard to stack up the economics of closing the last of the coal-fired power stations in 2045 and this explains why others such as Origin are weighing up the feasibility of closing their coal plants earlier than scheduled.

It is not a given that AGL shareholders will swing with the board on the demerger. But that doesn’t represent a vote in favour of the Cannon-Brookes/Brookfield bid.

In June shareholders could find themselves left with a third option – status quo.

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