Independent expert gives lukewarm clearance to Brookfield and EIG’s $18.7bn deal for Origin Energy
Grant Samuel says the $18.7bn takeover bid for Origin Energy is fair for now, but shareholders could be short-changed if the energy company fires up.
The foreign suitors behind a $18.7bn takeover of Origin Energy face renewed pressure to lift their offer after an independent expert concluded the electricity giant could be worth 40c a share more if earnings guidance is hit before the deal concludes.
If Origin meets its earnings guidance for the rest of 2023, shareholders will be asked to sell their shares at a small discount to their relative value, an independent expert concluded. Investors are likely to seize on that analysis to push for Brookfield and EIG to increase its $18.7bn bid, pitched at $8.81 a share.
Brookfield and EIG’s offer was predicated on an endorsement from an independent expert, which landed on Thursday but with a critical caveat.
Local advisory firm Grant Samuel said Origin shares were valued between $8.45 and $9.48 a share, but noted that should the company hit its earnings guidance for the remainder of the calendar year – when the consortium is set to close the deal – and assuming a 10 per cent return on equity – the retailer would be worth 40c a share more.
The forward-looking analysis surprised the consortium.
The findings clear a hurdle for Brookfield and EIG, but it is unlikely to do anything to sway sceptical Origin shareholders, which have voiced their opposition to the deal.
Origin on Wednesday raised its earnings guidance for 2024, indicating the company is extremely likely to be worth $8.85 a share – according to Grant Samuel’s analysis, which is higher than what Brookfield and EIG offered.
Origin earlier this year accepted an offer from Brookfield and EIG that values the retailer at $8.81 a share – a then 55 per cent premium on the share price of the Australian corporate heavyweight when it had not long earlier posted an annual loss of $1.43bn as it reeled from a global energy crunch.
However, an improved outlook for the company has seen analysts revise their valuation of Origin amid increasing confidence in the performance of the company.
Macquarie in September said it believed a fair value for Origin was around $10 a share.
Shares in Origin earlier this week touched a more than three-year high of $9.30 a share, and while ebbing away slightly – current pricing indicates investors believe a revised offer will have to come.
The Australian’s DataRoom column reported on Thursday that a higher bid was in the works.
Origin’s largest shareholder Australian Super and smaller investor Perpetual have indicated they believe the bid from Brookfield and EIG is too low, though neither have confirmed how they intend to vote.
AustralianSuper shapes as a defining voter. To succeed, the bid requires the support of more than 75 per cent of votes cast. AustralianSuper and Perpetual hold more than 15 per cent of Origin, leaving little wriggle room for Brookfield and EIG.
Brookfield and EIG have declined to comment on the push from some shareholders for more value, but The Australian understands the consortium has sought to convince shareholders that its offer is fair value when considering the impact on them of the vast spending required to develop renewable energy generation assets if Origin remains a public company.
The consortium is also likely to stress the volatility in global energy markets, which Grant Samuel acknowledges in concluding the valuation of Origin is difficult as Australia embarks on a rapid transition away from coal, but there remains significant uncertainty about when coal power stations can be retired without jeopardising reliability and affordability.
Still, market insiders tip Brookfield and EIG will have to up its offer, and The Australian reported on Thursday that its bankers were working on a revised bid.
A vote of Origin shareholders will now be held on November 23.
Australian authorities will privately hope a deal gets over the line, with a public Origin unable to match the scale of Brookfield and EIG’s ambition and finances.
Origin is targeting building around 5GW of renewable energy generation and storage, while Brookfield – which will acquire the retail and electricity arm of the Australian company, has said it intends to develop 14GW of new assets.
Brookfield will be complied to publicly publish how it is tracking with the renewable energy build-out as part of conditions imposed by the Australian Consumer & Competition Commission when it gave the deal the green light despite admitting it had some competition concerns.
The duo’s bid for Australia’s largest electricity and gas retailer is widely seen as critical for Australia’s hopes of meeting its ambitious energy transition goals. Brookfield has promised to spend between $20bn-$30bn on new renewable energy generation, much needed if Australia to meet its target of having zero emission sources generate more than 80 per cent of the country’s power by 2030.
The target is a key pillar in Australia’s plan to meet emission reduction targets, but the country is languishing behind the pace needed to wean its $2.5tr economy of its coal dependency.
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