Billionaire Mike Cannon-Brookes has received a significant battle in opposition to Australia’s largest power firm, AGL Power, thwarting its plan to separate up the corporate’s coal-heavy technology and energy distribution belongings.
AGL’s board introduced it was dumping its demerger proposal this morning. Heads have rolled too. Chief government Graeme Hunt, chairman Peter Botten and non-executive director Jacqueline Hey have resigned. One other director, Diane Smith-Gander, will go in August.
Nevertheless it stays to be seen if Cannon-Brookes and his allies can obtain their final aim – to power AGL, Australia’s biggest carbon emitter, to speed up the closure of its coal and gas-fired energy stations.
Cannon-Brookes’ arduous marketing campaign
The plan to separate AGL was as a result of go to a shareholders vote in mid-June, at which it required 75% assist.
Earlier this 12 months, Cannon Brookes – Australia’s third-richest individual – led two unsuccessful takeover bids for AGL, with the aim of taking the corporate non-public and retiring its fossil gas mills. He has campaigned arduous in opposition to the demerger on the idea it might hinder his plan for AGL to guide Australia’s power transition to renewables.
He strengthened his hand by spending, by way of his funding firm Grok Ventures, about A$650 million to amass a 11.3% stake in AGL – nearly half the shares wanted to thwart the demerger vote. This has made him AGL’s single largest shareholder.
Securing tremendous allies
Solely 10 days in the past, then chief government Graeme Hunt referred to as Cannon-Brookes’ opposition to the demerger “out-of-touch, undeliverable and irresponsible nonsense”.
However late final week, Cannon Brookes gained a symbolically vital ally in HESTA, the superannuation fund for well being and group service employees. It introduced it might vote against the demerger “as a result of it is not going to adequately assist economy-wide decarbonisation”. It stated a “proactive and orderly transition to internet zero emissions” was “in the most effective monetary pursuits of our members”.
HESTA holds simply 0.36% of AGL shares, however its siding with Cannon-Brookes was an indication AGL’s board was dropping the confrontation over what was greatest for shareholders.
AGL’s board confirmed that this morning when it withdrew the demerger proposal.
Why did AGL’s board need to demerge?
The board’s proposal to separate (or demerge) AGL into two entities was to extend returns to shareholders.
“AGL Australia” would concentrate on power distribution and buying and selling. “Accel Power” would personal AGL’s current half-dozen fossil-fuel mills – such because the Bayswater black coal-fired plant in NSW, the Loy Yang brown coal-fired station in Victoria and the Torrens Island gas-powered station in South Australia – in addition to its wind, photo voltaic and hydroelectric belongings.
The board argued this was good for shareholders in three key methods.
First, it might create two “pure-play” firms – specializing in just one line of enterprise – which might be extra enticing to buyers wanting particular belongings (resembling power distribution) however not others (resembling coal mills). This might result in a takeover bid providing more cash than what Cannon-Brookes and his companions provided.
Second, every firm would have centered managements, empowered to pursue methods and alternatives “primarily based on their distinctive belongings and capabilities”.
Third, shareholders would have the selection to divest from fossil fuels whereas nonetheless protecting their funding in distribution.
The AGL board additionally argued the demerger might speed up “decarbonisation past what may very well be achieved” underneath the prevailing construction.
This gave the impression to be primarily based on the brand new AGL Australia being partly free of the outdated AGL’s legacy fossil-fuel technology, and Accel Power having extra focus and higher entry to capital as a pure-play firm.
Why oppose the demerger?
Cannon-Brookes (by way of Grok Ventures) argued three notable objections.
First, splitting and duplicating administration constructions would cost a minimum of A$260 million, and $35 million a 12 months thereafter.
Second, the 2 new firms would have extra risky money flows and be much less in a position to stand up to monetary shocks. Accel particularly can be at “excessive insolvency danger” as a result of having so many belongings in coal-fired technology.
Third, and most significantly, the demerger would eradicate the advantages of AGL being a vertically built-in electrical energy generator and distributor. “We imagine that retaining vertical integration strategically positions AGL to guide Australia’s power transition,” Grok Ventures argued.
What now for AGL?
AGL is now in for a tumultuous interval. It’s unclear who will substitute Hunt as chief government or Botten as chair.
Cannon-Brookes has reportedly demanded two board seats. However shareholders can’t merely demand and obtain board seats, even when they’re the most important or loudest. The board should act for all shareholders – the vast majority of which can properly have supported the demerger.
By law, the board’s major obligation is to the company’s greatest pursuits – which implies maximising returns to shareholders.
On that foundation it had strong floor on which to suggest the demerger. Analysis exhibits that, on average, demergers, spin-offs and divestitures do profit shareholders, whereas mergers and acquisitions tend to destroy shareholder worth.
The board can’t adhere to what a minority of shareholders need – regardless of how worthy their trigger. It ought to typically not pursue social or coverage objectives until additionally they maximise shareholder wealth.
On the opposite facet of the ledger, the market has turned in opposition to fossil fuels. There may be declining long-term shareholder worth in coal-fired energy stations. Banks are reportedly reluctant to lend to AGL given its possession of coal and fuel mills. Nevertheless, it might appear logical for them to be prepared to finance renewable power investments.
AGL might doubtlessly grow to be a takeover goal, although the query is at what value. On Monday, its share value dipped as little as $8.52 – however that’s nonetheless greater than the $8.25 the Cannon-Brookes-led consortium provided in March. It’s potential, although, that they could revive that bid.
Other than Cannon-Brookes being positioned to play a bigger position, the long run is unsure. AGL has introduced one other strategic overview. However it’s not clear what, if something, this may obtain – given its earlier strategic overview led to the now scrapped demerger.