Billionaire Mike Cannon-Brookes has gained a significant battle in opposition to Australia’s largest power firm, AGL Power, thwarting its plan to separate up the corporate’s coal-heavy technology and energy distribution property.
AGL’s board introduced it was dumping its demerger proposal this morning. Heads have rolled too. Chief government Graeme Hunt, chairman Peter Botten and non-executive director Jacqueline Hey have resigned. One other director, Diane Smith-Gander, will go in August.
However it stays to be seen if Cannon-Brookes and his allies can obtain their final purpose – to power AGL, Australia’s largest carbon emitter, to speed up the closure of its coal and gas-fired energy stations.
Cannon-Brookes’ arduous marketing campaign
The plan to separate AGL was as a consequence of go to a shareholders vote in mid-June, at which it required 75% help.
Earlier this 12 months, Cannon Brookes – Australia’s third-richest particular person – led two unsuccessful takeover bids for AGL, with the purpose of taking the corporate non-public and retiring its fossil gas mills. He has campaigned arduous in opposition to the demerger on the premise it could hinder his plan for AGL to steer Australia’s power transition to renewables.
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He strengthened his hand by spending, by means of his funding firm Grok Ventures, about A$650 million to amass a 11.3% stake in AGL – virtually half the shares wanted to thwart the demerger vote. This has made him AGL’s single largest shareholder.
Securing tremendous allies
Solely 10 days in the past, then chief government Graeme Hunt known as Cannon-Brookes’ opposition to the demerger “out-of-touch, undeliverable and irresponsible nonsense”.
However late final week, Cannon Brookes gained a symbolically vital ally in HESTA, the superannuation fund for well being and group service staff. It introduced it could vote in opposition to the demerger “as a result of it is not going to adequately help economy-wide decarbonisation”. It stated a “proactive and orderly transition to web zero emissions” was “in the very best monetary pursuits of our members”.
HESTA holds simply 0.36% of AGL shares, however its siding with Cannon-Brookes was an indication AGL’s board was dropping the confrontation over what was greatest for shareholders.
AGL’s board confirmed that this morning when it withdrew the demerger proposal.
Why did AGL’s board need to demerge?
The board’s proposal to separate (or demerge) AGL into two entities was to extend returns to shareholders.
“AGL Australia” would deal with power distribution and buying and selling. “Accel Power” would personal AGL’s current half-dozen fossil-fuel mills – such because the Bayswater black coal-fired plant in NSW, the Loy Yang brown coal-fired station in Victoria and the Torrens Island gas-powered station in South Australia – in addition to its wind, photo voltaic and hydroelectric property.
The board argued this was good for shareholders in three key methods.
First, it could create two “pure-play” corporations – specializing in just one line of enterprise – which might be extra enticing to traders wanting particular property (reminiscent of power distribution) however not others (reminiscent of coal mills). This might result in a takeover bid providing extra money than what Cannon-Brookes and his companions provided.
Second, every firm would have centered managements, empowered to pursue methods and alternatives “primarily based on their distinctive property and capabilities”.
Third, shareholders would have the selection to divest from fossil fuels whereas nonetheless holding their funding in distribution.
The AGL board additionally argued the demerger might speed up “decarbonisation past what could possibly be achieved” underneath the present construction.
This seemed to be primarily based on the brand new AGL Australia being partly free of the previous AGL’s legacy fossil-fuel technology, and Accel Power having extra focus and higher entry to capital as a pure-play firm.
Why oppose the demerger?
Cannon-Brookes (by means of Grok Ventures) argued three notable objections.
First, splitting and duplicating administration buildings would price a minimum of A$260 million, and $35 million a 12 months thereafter.
Second, the 2 new corporations would have extra risky money flows and be much less capable of stand up to monetary shocks. Accel particularly can be at “excessive insolvency threat” as a consequence of having so many property in coal-fired technology.
Third, and most significantly, the demerger would remove the advantages of AGL being a vertically built-in electrical energy generator and distributor. “We imagine that retaining vertical integration strategically positions AGL to steer Australia’s power transition,” Grok Ventures argued.
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What now for AGL?
AGL is now in for a tumultuous interval. It’s unclear who will substitute Hunt as chief government or Botten as chair.
Cannon-Brookes has reportedly demanded two board seats. However shareholders can not merely demand and obtain board seats, even when they’re the biggest or loudest. The board should act for all shareholders – nearly all of which can effectively have supported the demerger.
By regulation, the board’s major obligation is to the company’s greatest pursuits – which implies maximising returns to shareholders.
On that foundation it had strong floor on which to suggest the demerger. Analysis exhibits that, on common, demergers, spin-offs and divestitures do profit shareholders, whereas mergers and acquisitions are inclined to destroy shareholder worth.
The board can not adhere to what a minority of shareholders need – regardless of how worthy their trigger. It ought to typically not pursue social or coverage objectives until in addition they maximise shareholder wealth.
On the opposite facet of the ledger, the market has turned in opposition to fossil fuels. There’s declining long-term shareholder worth in coal-fired energy stations. Banks are reportedly reluctant to lend to AGL given its possession of coal and fuel mills. Nonetheless, it could appear logical for them to be prepared to finance renewable power investments.
AGL might doubtlessly change into a takeover goal, although the query is at what value. On Monday, its share value dipped as little as $8.52 – however that’s nonetheless greater than the $8.25 the Cannon-Brookes-led consortium provided in March. It’s doable, although, that they could revive that bid.
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Apart from Cannon-Brookes being positioned to play a bigger function, the long run is unsure. AGL has introduced one other strategic assessment. However it’s not clear what, if something, this may obtain – given its earlier strategic assessment led to the now scrapped demerger.
Mark Humphery-Jenner owns AGL shares as a part of his superannuation fund.