Brookfield will have to raise lowball offer for AGL

AGL’s Bayswater power station in NSW. Picture: David Swift

The $4.9bn buyout proposal for AGL Energy by Brookfield and Atlassian co-founder Mike Cannon-Brookes is unlikely to be followed by offers from rival suitors, according to sources around the market.

But it is expected that the consortium will lift its offer from about $7.50 per share, which was only a 5 per cent premium to its last close, to more like $8 or $9 to see that it succeeds.

AGL on Monday confirmed it had rejected the Brookfield and Grok Ventures proposal that emerged at the weekend to buy the energy company for $7.50 per share.

Brookfield, which is also said to have been looking at Origin Energy, is thought to have been eyeing AGL for about six months, but Mr Cannon-Brookes, who had also been looking at the business for a similar period of time, only emerged as its partner shortly before the proposal came together.

While plenty of tyre-kickers are known to have been eyeing up AGL for a while, they have struggled to get a deal to stack up and other buyers have been deterred by its coal exposure or want it at a next-to-nothing price.

A scenario that could play out is one where AGL proceeds with its demerger of it coal-related unit Accel Energy, and a buyer comes forward for the other part of the company that is considered more attractive.

Telstra has always thought to be a possible contender and has publicly signalled an interest to venture into the energy space.

But most believe the telecoms giant would unlikely gain support from its shareholders at a time that even its core business is facing headwinds, and it has no experience running a major energy business.

Ampol has also been interested in the space, but AGL would be considered a bite too big for the fuel retailer.

Shell or Iberdrola could also be suitors, but taking on Brookfield – the Canadian-based private equity powerhouse with more than $US688bn ($953bn) of assets under management – would be brave.

Most around the market believe that Brookfield is the most suitable buyer, but it needs to pay more, given that AGL’s shares have recovered lately.

Yet chairman Peter Botten is expected to push for the demerger, which could cause the market to re-rate the stock.

Equally, there is a concern that the AGL shares could fall further than what equates to $7, leaving investors regretting that the company did not agree to the earlier bid.

Brookfield recently raised a major transition fund worth $15bn, run by former Bank of England governor Mark Carney, where it accelerates solutions to mitigate climate change. Few other buyers have that solution for Accel Energy, which is due to be demerged by June.

A clear signal that a higher bid is likely to be on its way from Brookfield is its statement after the offer was knocked back, saying that it was optimistic that an agreement could be reached with the AGL board.

The mooted deal has some casting their minds back 17 years ago when Alinta Energy made a proposal to buy AGL Energy and spun off the energy company.

Most believe Brookfield has a game plan, given it must have known it was never going to gain approval for a deal with an offer at a 5 per cent premium to the last traded share price. The shares closed 10.6 per cent up at to $7.92 suggesting the market is betting a higher offer is on its way.

Yet while it is cashed up and deal hungry, Brookfield remains disciplined on price.

And then there are the regulators – the big questions are what the government’s view will be on one of the country’s largest power generators from a national security perspective, and whether regulators approve of it owning AGL while also owning electricity transmission and distribution company AusNet.