Why AusSuper’s Origin block is a whole new ball game

AustralianSuper chief Paul Schroder’s fund has played a significant role in extracting more from the Brookfield-led consortium. Picture: Chris Pavlich

The green energy transition is now a new force playing out on markets, and AustralianSuper is prepared to use its $300bn balance sheet betting on what it regards as the new boom.

The industry fund may have succeeded in extracting a $1.2bn sweetener for Origin Energy, and it’s a brute tactic that stands to rewrite the way big super is viewed as an investor class.

By holding out in Brookfield’s now $16.4bn endorsed offer for Origin, it shows the rise of industry funds as a more assertive investor, which really are Australia’s new corporate playmakers.

What is clear is that energy represents the new big financial battleground. And AusSuper under newish boss Paul Schroder and chief investment officer Mark Delaney has nominated the energy transition as the major theme the mega fund is betting big on. The question AusSuper members need to ask: how certain can it be that this long-term bet will pay off?

Origin’s other shareholders also need to be aware that their interests aren’t necessarily aligned with AusSuper’s ultra-long-term horizon and more rosy assumptions.

And this is why Origin was sold off by more than 6 per cent on Thursday, with other big investors and hedge funds taking the cash now, rather than watch the Brookfield bid slowly unwind.

By playing hardball against a bidder that has committed up to $30bn to be spent on the promise of converting Origin into a green energy powerhouse over a short period – more than Origin can fund on its own – it also raises questions about whether AusSuper this time is truly aligned with the nation’s longer-term interests.

For its part AusSuper, which has $20bn of annual inflows that need to be deployed, has committed to invest heavily in transition and is prepared to back Origin.

Brookfield blinks

At the 11th hour, Brookfield and its partners have blinked in the face of AusSuper’s opposition and topped up its bid by 8 per cent to the equivalent of $9.53 a share.

It’s not enough. AusSuper is holding firm on the friendly bid, believing Origin is worth closer to $12 based on work it commissioned by Frontier Economics.

The two came to the conclusion that Brookfield’s endorsed $8.81-a-share offer and the assumptions used in the valuations were “unrealistically low”. Origin last traded around $12 nearly a decade ago, at the height of the LNG boom.

Origin Energy’s Eraring power station.

The new offer had been pitched above the top end of the independent expert’s valuation range for Origin shares of $8.45-$9.48, which is rare for an uncontested bid in Australian corporate history. There’s good reason. Bidders that pay over the odds for their targets usually come out second best.

Brookfield has also played out all its cards. It has declared the bid final and is determined to push ahead with the scheme with or without the backing of AusSuper. Failing that, it will revert into the market with an open bid, which at the very least could see it take management control of Origin and threaten to leave AusSuper locked as a stranded shareholder.

However, there are even doubts rising about that approach. Brookfield itself is representing a consortium of jumpy investors that are taking another look at the world and valuations with the prospect of interest rates being higher for longer. Walking away is a strong possibility.

Luke Edwards, head of Brookfield’s renewable power for Australia, says Origin has a massive amount of work ahead to get moving on energy transition ahead of 2030. “They’re going to have to fund that,” he says.

Without Brookfield’s bid, the options for Origin to fund it is with dividends and the other move is to potentially launch a capital raising. That’s going to come at a near-term cost to shareholders, Edwards says.

At the very least, the view from AusSuper about the value of Origin is long-term bullish. It is much higher against the valuation the Origin board and management have placed on their own business using the internal information and most optimistic assumptions.

Comparisons are being made about tech billionaire Mike Cannon-Brookes’ efforts in derailing the demerger for AGL. However, that move was destructive to shareholder value. This bid represents a premium on all the available evidence.

The measure of AusSuper’s success will be whether the Origin share price will be higher over time without the support of a Brookfield bid, and whether that is really in the long-term interests of its two million members.

Regardless of the inherent value AusSuper sees today, Origin faces a massive capex outlay building out its own green energy conversion, and it will come down to whether all shareholders have the appetite to pay.

Tectonic change

For the past 18 months, Origin chairman Scott Perkins has been right in the middle of the long-running talks with Canadian giant Brookfield. Ultimately, it’s on him to sign off on the merits of the bid. Perkins says the obligation of the board is to make a recommendation on what is in the best interest of the entire shareholder base.

“What we’re seeing is we’re in the middle of a big tectonic change, which is the energy transition, which has the potential for some wildly divergent views,” Perkins tells The Australian.

Origin Energy chairman Scott Perkins.

“But we’ve thought about that very carefully. That’s why we’ve landed in a recommendation.”

Perkins says while there are different views around the value of the energy transition, he concedes there is no “right or wrong”.

“We’ve got our own views as to what that likely path looks like, what the economics look like,” he says. “We live and breathe regulatory risks. We live and breathe the practicalities of actually building these assets. And we’re obviously mindful of the existing Origin ­assets and capabilities it is developing which will benefit the ­energy transition.

“We’ve actually put pen to paper to model it out, what its going to look like, the assumptions that we think are reasonable. You get to a view of value of the takeover and that requires us as a board to advise our shareholders in the whole, not shareholder one versus shareholder two, but in the round as to what we think is in their best long-term interests, whether they’re getting out adequately compensated.”

Perkins is quick to add that AusSuper has been a long-term and supportive shareholder of Origin.

Perkins is pragmatic about the process. Shareholders – not Origin or Brookfield – will ultimately decide the merits of the bid.

“We’ve been public about our strategy in terms of what we thought about the future development pipelines for renewable ­assets, but we would have a much more ambitious plan for that.

“We’re going to work really hard to make sure that our shareholders understand what this offer means. But in the event that shareholders decide not to vote it through, we’ll be back to business as usual.”

johnstone@theaustralian. com.au