AGL bid: Mike Cannon-Brookes rewrites the activist investing rules

The Loy Yang power station is seen in the La Trobe Valley east of Melbourne. Picture: AAP

The Mike Cannon-Brookes-backed bid for one of Australia’s oldest companies is seeking to change the way we keep the lights on.

It also rewrites the rules on activist investing, putting all carbon-belching businesses on notice that bigger financial forces could push them on a faster path to greening.

The lowball $4.6bn bid for AGL, coming on the eve of a federal election, is serious enough for a small army of bankers to have worked through the weekend and for the energy company’s board to convene a Sunday hook-up.

However, as forshadowed on Sunday, at these levels it didn’t get past first base. AGL said the unsolicited bid “materially undervalues the company on a change of control basis”.

The offer, which pushes out to $8bn when debt is included, represents just a 4.8 per cent premium to AGL’s Friday close of $7.16.

But even with AGL’s board, led by Peter Botten, formally rejecting the $7.50 a share bid before the ASX opened on Monday morning, this won’t be the last of it.

AGL is now a company in play, with rivals likely to be drawn out into the open.

Multi-billionaire Cannon-Brookes will steal the headlines in driving the green credentials of the bid in an effort to force the nation’s biggest carbon emitter, AGL, to fast-track its exit from coal-fired power in NSW and Victoria. Which will present its own shock to the nation’s stretched power grid.

Atlassian co-founder Mike Cannon-Brookes has launched a joint bid for AGL. Picture: John Feder

Critically he has teamed up with cashed-up Canadian infrastructure giant Brookfield, which remains a very serious player on the global financial stage. Brookfield is aggressively chasing renewable energy assets for their growth potential and it has billions of dollars tied up in ports, rail and property assets across Australia.

It is no green angel investor either, with a near 50 per cent stake in Queensland’s giant Dalrymple Bay Coal Terminal, which exports coking and thermal coal.

The bid is the latest twist for AGL investors who have had a wild ride in recent years, after seeing their shares collapse from nearly $28 each in mid-2017. It has seen brash US boss Andy Vesey put AGL on a damaging collision course with Canberra in a race to cover the company with green credentials. It saw some clear skies with his replacement Brett Redman, before his sudden exit on the eve of a radical demerger. All the while AGL’s earnings have come under pressure, with increasing renewable energy being pumped into the grid, undermining the economics of baseload legacy coal generators.

The bid comes when AGL is in the most strategically vulnerable position in its 181-year-history, amid plans for shareholders to vote shortly on the messy split: it is attempting to carve out its coal and gas power-generating assets from its greener retailing and renewables business.

The split was initiated by ex-CEO Redman, who pulled the plug, leaving former chairman Graeme Hunt to step in and see the demerger through. Investors were deeply concerned about the plan when it was outlined in June last year. It will see the creation of Accel Energy, which will house the legacy coal-fired power stations, and AGL Australia, which retains the retailing arm and clean energy assets.

The nation’s power market is undergoing massive change.

As well as a crimp on future dividends, there are fears the two companies will be structurally weaker and hungry for capital. One bright spot remains a run-up in forward energy prices as the world scrambles for gas and coal. AGL shares have so far increased 40 per cent in value from their low last November.

The timing of the bid also gives a headache to the federal and NSW governments.

It comes hot on the heels of Origin Energy last week putting in the required three-year notice that it intends to pull the plug seven years early on its Eraring coal-fired power station, which supplies more than 20 per cent of NSW’s electricity.

While AGL’s smaller Liddell plant is due to start being decommissioned from April, its bigger Bayswater plant that supplies more than 30 per cent of the state’s electricity is due to close at an accelerated date of 2033. In Victoria, AGL is now planning to shut down its massive brown coal-fired Loy Yang A plant in Victoria by 2045.

The fact is, despite the influx of renewable energy, Australia’s power grid can’t handle any more shocks. Big legacy generators play a crucial role in stabilising the grid and filling the gaps when renewables have gone to sleep.

Origin boss Frank Calabria was pushing ahead softly around the issue of security of electricity supply as he was outlining an early shutdown of his NSW-based Eraring plant last Thursday.

While Calabria said the nation’s power market was undergoing a rapid transformation, his three-and-a-half year notice of closure under the power market rules was “the start of a process”.

“It highlights the benefit of having a notice period so that we can all now have a line of sight to what plays out over the coming time and period,” Calabria said.

Even with AGL moving to put a quick end to the offer, Cannon-Brookes was settling in for the long haul, tweeting on Sunday that it was an “afternoon espresso kind of day”.