Origin Energy in line for windfall as Octopus Energy contemplates Kraken spin-off

Origin was an early investor in Octopus Energy, now the UK’s largest electricity and gas retailer. As the company mulls a split, shareholders in Origin stand to benefit.

Origin investor visit to Octopus London HQ. Picture: Ryan Jenkinson

Origin Energy’s investment in UK-based Octopus Energy is poised to pay dividends for the Australian electricity and gas giant as Octopus plots a break-up designed to unlock billions in shareholder value.

Octopus, the largest electricity and gas retailer in the UK, is close to appointing bankers to lead a major corporate restructure that would see its fast-growing technology arm, Kraken, spun off into an independent entity.

Existing shareholders in Octopus — including Origin which owns a 23 per cent stake — would receive shares in the stand-alone Kraken, with a partial sell down of up to 20 per cent expected to crystallise a valuation of £10bn ($20.9bn) for the utility platform business.

That could translate to an Origin cash windfall of around £460m, validating the strategic value of its minority holding in the UK energy player and Origin’s shareholders – most notably AustralianSuper – to reject a $20bn takeover bid from Brookfield and EIG Partners.

Origin Energy CEO Frank Calabria (left) and Octopus CEO Greg Jackson. Credit: Ryan Jenkinson

AustralianSuper chief executive Paul Schroder last week remarked how the superannuation giant had ultimately been proved correct in its opposition to privatising Origin.

“Don’t forget, we got belted for keeping Origin public,” Mr Schroder told Australia’s Economic Outlook in Sydney on Friday.

“So that was a situation where we were offered money for a public company which was way lower than our valuation, and we said, that’s the wrong valuation. We’re not selling. And it was very controversial,” the industry fund boss said.

Shares in Origin surged more than 6 per cent to $11.55 on Monday, buoyed by the prospect of a capital return.

The future of Octopus is being closely watched by energy investors and analysts, given growing global appetite for backing the technology underpinning the green energy transition.

Kraken, which licenses its software to major utilities across Europe, Japan and the US, has emerged as one of the most valuable assets in Octopus’ portfolio, thanks to its proprietary customer service and billing technology.

Octopus investors such as Tokyo Gas will receive a pro rata allocation of Kraken equity, giving them a direct stake in the fast-growing software business. Central to this plan is a planned sale of 20 per cent of the business (worth £2.05bn) to provide a benchmark valuation.

Angus Aitken, the Sydney-based stockbroker behind Aitken Mount, said the transaction makes a mockery of the valuation of Origin.

“The analysts who cover Origin were asleep to the value during the takeover, and most ‘instos’ are asleep as to the value of these Octopus/Kraken assets. The fact the highest price target in Origin from an analyst is $12.05 is laughable. We are more useful to listen to than these oxygen thieves,” Mr Aitken wrote in a note to clients.

Octopus did not comment on the proposal.

A restructure has been widely expected, especially after Octopus moved to operational separation and the appointment of a CEO for the platform business.

Kraken’s growth has been exceptional and there is growing confidence that it will reach a targeted 100 million accounts by 2027.

Origin made its $507m investment in Octopus in 2020, when the Australian energy company acquired a minority stake to gain exposure to new retail and technology markets.

Since then, Octopus has grown rapidly, adding customers and licensing Kraken to more than 65 million accounts globally.

The valuation uplift comes at a critical juncture for Origin, which continues to face the pressure of investing in new zero-emission generation sources to deliver the transition away from coal and lift shareholder returns.

Brookfield had sought to capitalise on those concerns, promising to invest $20bn in new renewable projects.

But AustralianSuper, which led the opposition to the Brookfield bid, was fixated in the valuation of Octopus in deciding the offer undervalued Origin.

If the restructure of Kraken materialises, attention will quickly turn to how Origin chooses to deploy any future proceeds. Origin is well advanced with its plans to replace its fossil fuel operations, and some shareholders will likely push for greater capital returns by way of dividends or a buyback.

A long-term bet on Octopus — once seen as a peripheral move — is shaping up to be one of Origin’s most lucrative bets.