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Your guide to the bitter AGL demerger
It’s not quite a 1980’s style corporate raider attempt, but it’s pretty darn close. Australia’s 4th richest man is trying to disrupt the dissembling of the country’s largest energy generator and retailer. After previously trying to buy the whole company twice, MikeCannon–Brookes, through his holding company Grok Ventures, has effectively secured 11% of AGLEnergyLimited (ASX: AGL) with a complex set of derivatives. He aims to vote against the proposed demerger (he even dedicated a website to it) scheduled for June 15, resulting in the separation of AGL’s retail and legacy generation business.
With the demerger requiring 75% of shareholders to vote in favour to be approved – and not all shareholders choosing to vote – MCB has become a very prickly thorn in the side of the AGL board.
The board argues that a demerger is the best way to unlock value from the company. To understand why we need to rewind. Historically, vertically integrated energy businesses (known as gentailers) like AGL have used energy generated from their extensive coal and gas assets as baseload power for their customer base. Since it was all under one umbrella, AGL could hold onto wholesale margin, secure supply and compete better for customers.
Then renewables began to disrupt the status quo. The growth of rooftop solar and wind meant energy prices can go negative during the day when supply is abundant, making legacy energy generation loss-making (paying customers to take energy). This shift has been coming for the better part of a decade. But management failed to act and position the company accordingly. As a result, the AGL share price is down 70% over the past five years and the board is trying to split it in two to capture what little value is left.
The retail division is a decent company that will attract investors on its own. It’s not dissimilar from Telstra Corporation Ltd (ASX: TLS), given it’s the number one energy utility retailer with some decent renewable assets. But the pain point is Accel Energy. It owns a stable of assets that are no longer particularly attractive and need redevelopment. Most banks are unwilling to lend to fossil fuel companies, increasing the cost of capital. On its own, investors take significant operational risk, evident by the recent closing of Loy Yang A Unit 2 until August. Plus investors have to trust AGL to develop ‘energy hubs’, something the business has little expertise in.
Historically, MCB has been a public beacon for greater action on climate change. He wants AGL to shut down its coal plants quickly, and transition to renewable energy faster. It’s not yet apparent why he couldn’t just do that with Accel Energy demerged. Possibly he hopes to keep the gentailer model where energy generation is used to support retail demand, therefore, bringing emissions down sooner. Keeping the two together would make sense financially. Earnings from the retail division could be used to fund the redevelopment of the generation business.
While this all sounds noble, the primary issue is that MCB has no detailed plan. Well, he hasn’t shared one pubicly. It’s easy to throw stones, but proxy advisors and institutions can’t be expected to vote against a demerger that at least in the short term could provide some level of shareholder accretion. The complex series of derivatives he owns the 11% stake also makes investors nervous. What if he decides overnight to dump his holding? Hence the dilemma facing shareholders.
Do you take a punt on a billionaire without a concrete plan? Or do you trust the incumbent board that has destroyed shareholder value and owns just 0.012% of the company themselves? It’s not a very enviable position to be in. Although if MCB can develop a credible alternative before the demerger date, there is enough support and goodwill to suggest he could get it over the line, or at least force the AGL board to reconsider.
The best outcome for suffering AGL shareholders is that MCB and the board come to the table and thrash out a plan. With the MCB tick of approval, it will give shareholders faith the AGL board has a credible path forward and is aligned with investor interests. However, given both party’s reluctance to engage constructively this seems unlikely. Add in the fact the board needs 84% of the remaining votes means the demerger already looks dead in the water.
For the moment, AGL is in limbo. Possibly we will see a return to the corporate tussles of the 1980s.
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