AGL Energy dumps demerger plans with CEO Graeme Hunt and chairman Peter Botten set to leave

Demands for an early coal exit and Paris-aligned climate ambition are top of AGL investors’ demands but Mike Cannon-Brookes faces opposition to his bid to secure two board seats.

AGL Energy, Australia’s biggest electricity generator, has scrapped its plans to split off its coal-focused generation business. Picture: NCA NewsWire /Brendan Beckett

AGL Energy will face demands for a swifter exit from coal and Paris-aligned climate goals after dumping its long-running demerger plans, but the company’s chief protagonist Mike Cannon-Brookes faces early opposition from a big investor to gain two board seats.

The power giant, Australia’s biggest electricity generator, scrapped its plans to split off its coal-focused generation business – with chief executive Graeme Hunt and chairman Peter Botten among four directors to leave the company.

A plan by Mr Cannon-Brookes to accelerate the retirement of AGL’s coal fleet up to a decade early by 2035 or sooner is now expected to receive stronger backing, sources at AGL told The Australian, while creating an alternative business strategy that can meet international climate goals would also be critical.

“Coming up with a Paris-aligned plan for the company creates a lot of certainty as well as the government legislation that is likely to change in the next period of time with the new government,” Mr Cannon-Brookes said, referring to Labor’s 43 per cent emissions reduction plan for 2030.

Top 10 shareholder Van Eck agreed a Paris climate plan was critical to reboot AGL as a stand-alone company.

“We want to see a genuine decarbonisation plan, while maintaining jobs and obviously the electricity … without a huge increase in prices as well, and then finally, once they’ve laid out that pathway, they need to seek financing to enable that to go ahead,’’ Van Eck’s Jamie Hannah said.

Super fund Hesta indicated it wants to work with a new CEO and board to provide a “clear understanding” of the expectations of global investors.

“Namely, that AGL’s future success is best served by a transparent Paris-aligned decarbonisation that seeks to enhance and protect shareholder value, while providing comprehensive support for impacted communities,” Hesta chief executive Debby Blakey said.

Mike Cannon-Brookes’ plan to accelerate the retirement of AGL’s coal fleet up to a decade early by 2035 or sooner is now expected to receive stronger backing. Picture: Zan Wimberley.

Mr Cannon-Brookes, who was part of a failed bid for AGL alongside asset manager Brookfield, last Friday wrote to the company’s board demanding two seats if the demerger plan did not proceed. “We’ve been pretty clear with the company what we think needs to happen with the board but we’ll have to see how the engagement goes with them,” he said.

The billionaire’s Grok Ventures expects to meet this week with AGL directors Vanessa Sullivan and Graham Cockroft, who are overseeing a strategic review.

Still, one big shareholder said he was concerned at Grok’s push for two board seats, which it saw as at odds with an 11.3 per cent stake.

“We need good governance, expertise and vision. But we can’t have a vested interest getting control of the company when they don’t own it,” said Martin Currie Australia chief investment officer, Reece Birtles.

“AGL needs to represent all shareholders’ interests. Grok has some valuable insights but is not entitled to two board seats at current ownership levels.”

Cancelling the demerger has raised the prospect of raiders swooping with a fresh takeover bid but political ructions could prove a hurdle given soaring power prices, MST Marquee said.

The company is now seen as being effectively up for sale after confirming it would consider approaches from third parties, raising speculation that Mr Cannon-Brookes and former bid partner Brookfield could return with a new tilt. However, the tech titan said he’d had no recent talks with Brookfield and was not focused on any M&A activity.

MST Marquee analyst Mark Samter said any suitor would face a tough environment to navigate.

“They do mention the consideration of any new approaches from third parties, but who would be willing to take on this whole business in the current political climate is beyond me,” Mr Samter said on Monday.

“It would be a desperately easy line for a sales person to say that this opens up the door for a bid now, but to me that belies the reality of where electricity markets are at present.

“Electricity markets are close to imploding, with FY23 futures at >$240/MWh in NSW – it is Europe, just with more rain.”

Mr Samter said AGL was going to have to spend $10bn-$15bn at least to replace the circa $1bn of earnings coming from coal assets, and questioned the decision to launch another strategic review.

“It is slightly comical that the board will now do a strategic review, given the strategic review of 15 months ago is what landed at the decision to demerge.”

AGL has dumped its long-running plans to demerge with its CEO Graeme Hunt, pictured, and chairman Peter Botten among four directors to leave the company. Picture: Aaron Francis

The review will weigh up how to create long-term shareholder value amid decarbonisation pressures and energy affordability issues, assessing plans developed for AGL Australia and Accel Energy and approaches from third parties regarding alternative transactions.

AGL now also faced issues establishing new debt facilities after its demerger was dumped, with existing facilities cancelled and the power giant’s coal assets at odds with financiers’ green focus, Ord Minnett said.

The announcement left the company in limbo with uncertainty over opting for a strategic review rather than proceeding with the company split.

“Through the demerger process, debt facilities had been secured for each of the two entities. These new facilities will be cancelled leaving the company to have to refinance debt in a far more challenging environment, considering both higher interest rates and even greater environmental hurdles,” Ord Minnett analysts said in a note.

The broker said while the outlook was positive given higher electricity forward prices, it kept a hold recommendation given the likely instability in the stock as it changed direction and reappointed management.

AGL was now “back to square one”, according to RBC.

“The board (led by Vanessa Sullivan and Graham Cockroft), will once again review AGL Energy’s strategic direction. Interestingly, AGL has stated the relevant dates for closure of coal-fired power stations will continue to be accelerated. This has been the main argument from Cannon-Brookes.”

The AGL demerger endured a rocky start after then AGL chief executive Brett Redman resigned in April just four weeks after touting the merits of the plan.

The appointment of Mr Hunt, AGL’s former chairman, as his interim replacement also unsettled some in the market. Mr Hunt was named as CEO of Accel, which would have operated the power generation assets. Former Australia Post executive Christine Corbett would have taken charge of the renamed AGL Australia, the retailer.

Mr Botten, a former Oil Search CEO, was to chair Accel with AGL non-executive director Patricia McKenzie chair of AGL Australia.

Some in the market, however, did support the demerger plans.

Last week, Morningstar analyst Adrian Atkins wrote: “While it’s true there will be extra costs and a loss of scale compared with the status quo, it is irrelevant as banks won’t support the business in its current form.”

AGL fell 1.7 per cent to $8.72.