Coal wins out in bid tussle over Australian energy group AGL
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
AGL, the Australian energy company, argues it has been on the “forefront of energy innovation” over its 185-year history, and perhaps it has a stronger claim than most.
But the company’s adherence to coal as the world moves towards more renewable sources of energy left it vulnerable to an unusual takeover bid that sought to accelerate its green transition.
Brookfield, the Canadian fund that is increasingly active in Australia, teamed up with Mike Cannon-Brookes, the bearded, baseball cap-wearing Australian software billionaire, to bid for the company last month. They wanted to shut down AGL’s coal-fired power plants much earlier than scheduled in what Cannon-Brookes described as the biggest decarbonisation project in the world.
AGL resisted despite its history of energy transitions. The company was founded in 1837 as the Australian Gas Light Company to install the young country’s electricity network to light up Sydney’s streets, a move that weaned the city off whale oil lamps.
Over the next 100 years AGL was also central to another energy transition as households replaced wood-burning stoves with gas. AGL not only built the networks further into the regions but also held tens of thousands of cooking classes to tempt more houses to upgrade.
Yet it seems to have been left exposed by the speed of the shift towards renewable energy, in particular the spread of rooftop solar power in Australian homes. As recently as 2013, it increased its bets on coal, acquiring three power stations fired by the fossil fuel, including the giant Loy Yang facility in Victoria. AGL is the country’s largest generator of electricity using coal and the single biggest emitter of greenhouse gases.
AGL’s market value has plummeted 70 per cent in the past five years as the economics of the energy industry radically changed. The company found that some of its own shareholders, notably BlackRock, wanted a clearer and faster path away from coal.
It has responded by announcing a plan to split into two by separating its coal-fired stations from its large retail business and renewable energy assets. The plan has yet to convince investors and AGL’s share price crashed to a 20-year low last November.
After launching his joint bid with Brookfield, Cannon-Brookes took to the television screens to describe how the near-A$8bn (US$6bn) bid would transform Australia from a climate laggard into a green energy powerhouse. He outlined a A$20bn investment in renewable energy. Brookfield also did the rounds of government to press for the bid’s prospects
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Yet the charm offensive for the bid failed to land in two key places: the company’s boardroom and Canberra. AGL’s management was adamant that Brookfield was trying to buy the company on the cheap and that the existing demerger plan would create more value for shareholders than selling it off at its nadir. The investment plan was vague, argued advisers to AGL.
They said that with its millions of customers, AGL could be a very valuable asset in an energy market where billions of dollars are poured into clean energy projects that lack an established asset to build upon.
A bigger speed bump was Australian prime minister Scott Morrison who once brandished a lump of coal in parliament in support of the fuel. When asked about an AGL takeover, he warned of the need to protect jobs and keep energy prices low.
Morrison said his government needed to ensure coal-fired generation of electricity continued and that he was “very committed to ensure we sweat those assets for their life”. The remarks appeared perverse to many who had presumed that the Morrison government would welcome a market-based approach to energy transition.
Brookfield and Cannon-Brookes raised their bid but that did nothing to persuade AGL’s management to come to the table. So the bidders walked away.
More globally, energy transition assets are likely to continue to attract strong demand. Only last week Australian fund Macquarie paid £4.2bn for National Grid’s UK gas network and promised to invest in the asset to prepare Britain for the green economy as its energy transmission needs move towards hydrogen.
But since the AGL bid, Russia’s invasion of Ukraine appears to have stalled the push against coal as energy security fears have risen. If Accel Energy — which will run AGL’s coal-fired operations — is spun out later this year as planned, then it will provide a test for how investors now value fossil-fuel assets and whether AGL was right to hold out.
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