Will a second bidder step up for Origin?

An $18bn foreign takeover bid for Origin Energy has shown why the energy giant should be worth more to the right local buyer than the $9 offer price accepted by the board.

The $18bn foreign takeover bid for Origin Energy sits at the intersection of some hugely significant dynamics that are shaping investment in Australia and indeed shaping Australia.

The two main ones are the desperate search by ‘big super’ – from anywhere in the world - for long-term utility-style income generating assets, and the so-called ‘transition’ away from carbon-based energy.

Ironically, amusingly, and what should be tellingly, a sub-dynamic is the surge in global demand for gas, in the wake of Russia’s attack on Ukraine – with gas, the last time I looked, exactly one of those carbon-based fuels the world is supposedly abandoning.

Now, the bid should lead to competing offers from local super funds. Indeed, the two bidders have indirectly shown precisely why Origin should be worth more to the right buyer or buyers than their $9 offer price that has been accepted by the Origin board. Whether or not it does is, of course, an altogether different matter. Origin and its upside have been sitting out there in plain sight not just all year but for the past three or four years and nobody else has bitten.

The strategy behind the bid is simple. Brookfield gets the ‘tomorrow’ Origin with its ‘new energy’ generation assets and its retail business – and so a utility-style, supposedly relatively stable, future income stream, with long-term growth built into the value of the asset.

Origin Energy boss Frank Calabria. Picture: Justin Lloyd.

Its partner, the US energy investor MidOcean, takes Origin’s 27.5 per cent stake in one of the three Gladstone-based LNG export operations, which have been generating huge profits in the wake of the Russian invasion and the soaring price of gas everywhere. There’s no reason at all why the two businesses need to be separated. Indeed, it makes great sense to keep them together – whatever one thinks will happen to gas in the ‘energy future’ being created and/or fantasised.

As the events this year have shown, a stake in an export LNG business is close to the perfect hedge against just about everything: geo-politics, economic ups and downs, energy so-called ‘transition’. So, the Canadian Brookfield’s decision that it needed a partner to take the stake was purely corporate strategy. Presumably, Brookfield wants to give its superannuation investors a ‘clean’ future-energy utility-style investment.

Despite the gushing in some quarters, the $9 offer price is not so spectacularly, utterly un-rejectable – and un-toppable – high. Even though it was 55 per cent above the previous close

The bidders started at $7.95 and quickly went to $8.70 to $8.90. That’s to say. Origin really only got them to lift their offer by 10c to 30c a share. Some arm-twisting.

After the offer was revealed the share price only went up to $7.83, well shy of the $9, suggesting serious investor caution that the bid might be stymied by regulatory issues.

The biggest is competition, since Brookfield spent a similar $18bn earlier this year to buy the AusNet transmission business. Origin would add both generation and a retail business - giving all-but integrated ownership from start to end-consumer.

I’d make the following points. The energy future is going to be much more diffused than what we have now. Ownership across the three stages won’t deliver the price-setting power of yesterday.

Brookfield went into this with its eyes open. It must believe there shouldn’t be a problem. It must also know what it can offer the regulator to satisfy competition issues: prices caps, selling down or selling assets. Right now we have the potential for an old-fashioned auction if local big super wants to step into the ring.

It should be a no-brainer. The taxpayer and the consumer are going to underwrite the so-called ‘transition’. And reality is going to maintain the demand for and the – high - price of gas.