What exactly is being proposed?
It is, by any measure, an extraordinary intervention in Australia’s rapidly evolving electricity market. A consortium worth hundreds of billions of dollars on Saturday lodged a formal offer to buy AGL Energy – the country’s biggest greenhouse gas emitter – for just short of 5% above the closing share price on Friday.
The headline name behind the bid is Mike Cannon-Brookes, the 42-year-old co-founder of software company Atlassian, green solutions investor, climate action advocate and one of Australia’s richest people. But in reality, Cannon-Brookes’ company Grok Ventures is the smaller player in the consortium, which is led by Brookfield, a Canadian investment giant with $688bn worth of assets under management last year. Including AGL’s debt, the bid was just short of A$8bn.
Why are they doing it?
According to the main players, a significant part of the motivation is to close and replace the company’s coal-fired power plants and prevent a controversial demerger that would hive off those coal plants from AGL into a new entity called Accel Energy.
The consortium says it has up to $20bn to spend on building and contracting at least 8 gigawatts of renewable energy and energy storage to replace about 7GW of existing power plants. AGL’s Bayswater and Loy Yang A coal plants, currently scheduled to shut by 2033 and 2045, would be gone by 2030. The company would reach net zero emissions by 2035 and suddenly be playing its part in limiting global heating to 1.5C, in line with scientific advice.
The proposal is much bigger than just the coal power plants. It would involve Brookfield and Grok Ventures acquiring all of AGL’s generation assets and its retail business. Cannon-Brookes stresses it isn’t a philanthropic investment.
He says he is confident backing renewable energy over ailing old coal power plants can keep electricity prices down, create 10,000 construction and 600 ongoing jobs and wipe out about 40m tonnes of carbon dioxide a year – more than 8% of Australia’s annual emissions footprint – while turning a profit.
Analysts and some within AGL see access to the company’s 4.5 million customers across the country as a key motivation for any would-be suitor.
For Brookfield’s part, it is a shareholder in significant fossil fuel assets, but it is noteworthy that the bid includes the name of Mark Carney, the company’s head of transition investing since 2020. He made his name as first the governor of the Bank of Canada, then the Bank of England, and then the United Nations special envoy for climate action and finance in the lead-up to last year’s Cop26 summit in Glasgow. A Brookfield renewable energy arm has about US$65bn assets under management.
The bid is timed with at least one eye on the upcoming demerger, which AGL declared on Monday was on track to happen by 30 June. The consortium says the split risked leading to the separated entities trading at a lower share price, reducing value for shareholders.
How did the company respond?
There was a swift rejection after the board met on Sunday afternoon. It claimed the offer “materially undervalues the company”, as it offered only a 4.7% premium on Friday’s share price.
The consortium rejected this rebuttal just as quickly. It says the offer represented about a 20% premium on the company’s three-month volume-weighted average share price of $6.28 and pointed to its expectation the value would fall after the split. Cannon-Brookes told Guardian Australia on Monday the consortium would continue to engage with AGL and he would focus on “trying to explain to shareholders why we believe this is the best option”.
Within AGL, there was some excitement at the prospect that a billionaire entrepreneur with Cannon-Brookes’ success at creating a software firm was making a play for the company. It had lost up to 80% of its share value over the five years prior to the takeover offer although its stock had started to bounce back in the past 12 months. AGL shares gained more than 10% during Monday’s trade.
Putting aside the business machinations, is this even doable?
According to the experts, yes, though it would be challenging. Cannon-Brookes was quick to point to a draft blueprint for the future grid published by the Australian Energy Market Operator in December, known as the integrated system plan.
That document suggested under a step-change scenario – now considered the most probable path – coal would exit the system at roughly three times the pace than proposed and there could be a ninefold increase in large-scale renewable energy such as wind and solar farms. It is not a report the Morrison government tends to emphasise.
No one disputes that the rise of renewable energy is making coal plants unviable as the around-the-clock generators they were meant to be. They can’t compete with an influx of cheap solar energy in the middle of the day and were mostly not built to ramp down and then back up when needed. Department officials project renewable energy will increase from about 30% now to 69% by 2030. Labor says under its policies it would reach 82%.
It is not only AGL that is under pressure. In the most recent announcement, Origin Energy gave notice that the country’s biggest coal-fired power plant, Eraring, could shut seven years earlier than scheduled – in 2025 rather than 2032.
The consortium says they can drive a rapid change at AGL in a way the current public ownership can’t because raising the vast amount of capital needed is difficult, but they already have it.
Are there unanswered questions?
Plenty, including whether the consortium would be open to paying more and the timing and specifics of the investment plan. The bid would have to be cleared by the Foreign Investment Review Board and the Australian Competition and Consumer Commission – and possibly the Morrison government, should it choose to intervene.
Buying AGL would involve taking on 3.2 million gas customers. Cannon-Brookes indicated the consortium would want to move them to renewable electricity, a significant undertaking in its own right.
Cannon-Brookes acknowledges it is “on a global scale a massive decarbonisation effort” but says the plan makes sense. The consortium’s offer letter says it conducted detailed market modelling with consultants Marsden Jacob Associates and was confident its plan was achievable.
“The economics stacks up, the science stacks up, what we require is just the gumption to go for it and actually make it happen, and that’s what we’re trying to do,” Cannon-Brookes says.
