Origin Energy is undervalued in Brookfield and MidOcean’s bid, says Macquarie

The $18.7bn bid by Brookfield and MidOcean now undervalues Origin, Macquarie says – an assessment that is likely to place pressure on the consortium to increase its offer.

Brookfield and MidOcean’s bid for Origin Energy undervalues Australia’s largest electricity and gas retailer, Macquarie says, an assessment that will pile more pressure on the consortium to increase its bid.

Origin earlier this year accepted an offer from consortium, in a deal that values the retailer at $8.85 a share. But Macquarie analyst Ian Myles said Origin’s value has now increased, and a fair value would be between $9.49-$10.08 a share.

Mr Myles said Origin has recovered from the chaos that plagued Australia’s energy markets in 2022 faster than anyone had foreseen, while the company equity stake in Octopus Energy – which has grown rapidly to become the UK’s second-largest retailer – has also increased its value.

“We see the circumstances have materially improved for Origin. Octopus’s value has step changed, Origin’s energy market earnings have benefited from the coal cap and recovered faster than management anticipated, and extending Eraring, will extend profitability compared to losses when the decision was made in February 2022,” said Mr Myles on Tuesday.

The assessment will fuel pressure on Brookfield and MidOcean to increase its offer, as several shareholders begin to openly call for a revised bid.

A spokeswoman for Brookfield declined to comment.

Sources close to Brookfield insisted the offer did envisage Origin’s recovery and the temporary coal price cap that has bolstered the revenues of Origin’s Earing coal power station.

The sources cautioned against hyperbole around Octopus, and critically pointed the financial hit on Origin’s shareholders of going alone in the energy transition.

Brookfield and EIG said investment in new clean energy would now total between $20bn and $30bn to develop 14GW of new, large-scale generation and storage capacity in Australia.

Should a deal with Brookfield and MidOcean not materialise, sources said Origin would need to raise equity, reduce dividend payments or find a partner that would be dilutive to shareholders in Australia’s largest retailer.

Other Origin shareholders said they were still evaluating their own view on Origin’s value, and would wait until an independent expert report before making a final decision.

Still, the Macquarie call is an unwelcome headache for the Canadian private equity giant, which is already battling to secure regulatory approval for the purchase.

The Australian Consumer & Competition Commission must rule on the Brookfield bid by the end of the month, but has hinted it remains so-far unmoved by the private equity commitment to ringfence AusNet.

AusNet is Victoria’s principal electricity transmission network, it is one of just five electricity distribution networks in Victoria, and it is one of three gas distribution networks in the state and the ACCC is seemingly concerned that Origin would have preferential access to transmission and access to critical information that would afford it a competitive advantage.

Sources close to Brookfield have dismissed any suggestion it would risk substantial fines, but in a bid to win favour with the ACCC, Brookfield earlier this month promised to split its infrastructure business from the unit that develops renewable energy projects and separate its transmission operations from Origin Energy.

The ACCC’s decision is a watershed moment for Australia’s energy transition plans. Should the regulator approve the deal, Australia is likely to accelerate its transition away from fossil fuels.

While Australia has seen a flood of capital committed to the country’s energy transition, few have the depth of pockets of Brookfield, and the lure of a spate of investments will be alluring to a country that is struggling to meet its lofty ambitions.

Australia has set an ambitious goal of having renewable energy generate 82 per cent of the country’s electricity by 2030. But Australia is struggling to keep pace with the retirement of coal.

Australia is lagging so far behind that the country’s energy market operator warned earlier this month that urgent investment was needed or reliable electricity supplies cannot be guaranteed over the next decade.

Should it clear the ACCC, the consortium will also need clearance from the Foreign Investment Review Board, but investors believe the competition test is the highest hurdle for the deal.

If the regulator rules against Brookfield and MidOcean, the consortium could appeal, which would prolong the saga through the courts.