After a month of silence Origin Energy says it has started talks with rival AGL Energy on a merger to form a company that would supply power and gas to half of eastern Australia’s households.
But it is going to be a long time happening, if it all, thanks to the need to sell off customer bases in Victoria, South Australia and Queensland to satisfy the competition regulator, the ACCC.
As well the mooted ‘merger of equals’ as suggested by AGL Energy in its announcement on January 4 might not be how Origin sees the situation evolving, judging by statements from official spokespeople yesterday while the attitude of shareholders in both companies to a nil premium merger also remains to be tested.
To work it has to be a paper transaction: both companies can’t afford scads of cash and in a transaction with a value of $14 billion (on paper), any suggested cash component would see the rating agencies put the two companies and their combined successor, on credit watch negative for a downgrade.
The rating agencies are already warning investors the power infrastructure industry is becoming more highly geared, with an increasing cash call for new facilities, while all the corporate dealing goes on between the likes of AGL, Origin, Alinta, Truenergy and smaller players.
AGL is our biggest energy retailer and it revealed at the start of last month that it had made an initial approach to Origin for a merger under which Origin shareholders would receive no premium for their shares.
At $6.6 billion, AGL’s market value $1.2 billion less than Origin’s.
AGL welcomed Origin’s decision
Origin rose as much as 19 cents, to $9.30 before settling back to $9.14, up 3c as the initial rush of enthusiasm for the deal disappeared. But they are still almost nine per cent up on the level before the January 4 statement from AGL.
AGL however fell 35 cents, to $17.41 before recovering to end at $17.70, down just 6c. AGL shares are up more than 10 per cent since early January.
Analysts feel Origin will want a takeover premium but that should be the least of their worries.
If both companies want to deal they have to figure out a way of dancing while keeping the competition chaperone happy.
Analysts suggest that a merged AGL-Origin may need to sell at least hundreds of thousands of customer accounts in Victoria, South Australia and Queensland to win the competition regulator’s approval for a merger.
South Australia and Victoria would still create problems after any disposal because of the high market shares in both states.
The ACCC has said that it will review any merger proposal “closely and thoroughly.”
AGL Energy in October completed a huge asset and debt swap with Western Australian energy utility, Alinta (which now is on the market).
AGL owns power plants and stakes in oil and gas fields in Papua New Guinea, as well as a retailing business. It intends taking a 27.5 per cent stake in Queensland Gas Company, a coal seam gas company (it is in competition with Santos) and signing a long term supply contract .AGL last week bought the Torrens has-fired power station in Adelaide from Truenergy for more than $400 million.
Origin has having fewer customers in Australia but it has an oil and gas production business (Bass Strait for example) and also owns 51 percent of Contact Energy, New Zealand’s biggest publicly traded energy company. It also has power stations in Australia, and is seeking to sell its networks unit, including a stake in Envestra Ltd., an interest in a gas pipeline and an asset management business.
I think the key to any deal can be found in the way Toll Holdings is trying to sneak a solution to its competition problems through the ACCC.
Toll is putting its infrastructure businesses in one company and the services operation (transport etc) in another. Most of the debt will be laden onto the infrastructure (ports, rail) company while Toll expands in Asia.
A combined AGL-Origin could put all those competition worrying customers and other assets in one company, stick it with debt, and all the distribution assets in another company.
If Toll gets its split through the Commission, Origin-AGL and its advisers mightbe able to do the same.