Private players reshape Origin Energy’s green challenge, say Kevin McCann and Grant King
Former Origin chairman Kevin McCann and chief executive Grant King said the weight of private capital is transforming Australia’s listed-company landscape.
Origin Energy’s inaugural chairman says the power giant would struggle to fund its own way through the bulging spending needs required to deliver green generation, with former boss Grant King arguing an onslaught of private money would continue to pick off ASX-listed corporates.
The electricity and gas operator gave Brookfield and energy sector investment firm EIG the green light to conduct due diligence after the pair lobbed an $18.4bn bid, with the $9 per share offer to be recommended should a binding deal be submitted.
Brookfield has pledged an extra $20bn of spending on renewables should it prevail with its joint bid and ex-Origin chairman Kevin McCann said striking that scale of investment might have been beyond his former company.
“In terms of Origin, I guess they would have been stretched to find the capital needed to make a similar investment,” Mr McCann told The Australian.
Origin chief executive Frank Calabria on Tuesday said the company would be able to fund its way through the transition if it remained as a public company, but said the Canadian’s cash injection might speed up the process.
Mr McCann backed the takeover given a 55 per cent premium and deep funding pool that could fast-track Origin’s move towards greater green energy sources.
“Brookfield will be good stewards of the retail business and Australia gets the benefit of foreign capital. You have $76bn that the country needs to invest just up to 2030 to get to that target, so foreign capital is going to be needed.”
Mr King, who led Origin for 16 years after its spin-off from Boral in 2000, said private capital was prepared to pay a greater premium for quality assets.
“It is interesting that we’re seeing private markets ascribe a lot more value to some of these assets than public markets. It’s an interesting trend for any listed business and for the markets at large. It just feels to me that we’re seeing potentially another round of listed companies disappear,” he said.
“And I think there’s a long-term question again about that valuation gap and what it means for the market at large. Is there an underlying trend here where the market itself may thin out a bit. We see this trend from time to time in the Australian market. But at the end of the day, shareholders want to see the best value for their assets and they want to realise that. So it’s a good thing.”
Mr King said the Brookfield-led bid offer reflected the strength of the business after a tough period for shareholders with its shares under $5 a year ago.
“From a sentimental perspective, it’s pleasing to see the value of the portfolio has been recognised by the bidders. Now, it’s not for me to judge whether that’s the appropriate and full value. But it’s a lot more than what it was trading at.”
Mr McCann, who stepped down as Macquarie Group chairman in 2016, pointed to a string of companies taken private where he sat on the board, including Healthscope, snapped up by Brookfield.
“I started off at Pioneer Concrete in 1976 and they were taken over in the early-1990s,” he said.
“Healthscope got taken over, Citadel got taken over, but BlueScope and Macquarie are still standing, which is good.
“Once upon a time in Wall Street, you had an average of 40 years, but it seems in Australia the life expectancy of corporations on the ASX can be much shorter.”
The private equity buyout would see Origin split into two. Brookfield would control Origin’s energy markets business comprising electricity and gas retailing while EIG’s MidOcean unit would buy the integrated gas business, which includes the prized Australia Pacific LNG export plant in Queensland.
One potential headache for both bidders is the prospect of looming market intervention. While a super profits tax appears to be on the backburner, a price cap to ease high domestic gas costs for manufacturers may erode earnings for both suitors.
The former Origin chairman said governments needed to recognise the cyclical nature of the industry, recalling negative oil prices just over two years ago.
“We had oil prices go to almost zero. And the company went through after I left the chair and Gordon Cairns became chair a really tough time with commodity prices. That was reflected in having to write off a lot of capital. That was very challenging times with no dividends available as they paid down their debt,” Mr McCann said.
“It just demonstrates when you’re in the commodity business that people forget today – when there’s talk of super profits – that we did it pretty tough for a number of years that shareholders got no return and the company had to write off capital,” he said.
“The company is now just recouping that.”
Origin slumped to an annual loss in 2021 of $2.3bn after taking a hit from a major writedown.
Brookfield and EIG kicked off a six-week period of due diligence on Origin on November 14 after tabling the $9 a share bid, its third offer after respective $7.95 and $8.70 to $8.90 tilts.
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