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Value or virtue? Origin takeover hangs in the balance

Canadian fund giant Brookfield and its consortium partner MidOcean’s efforts to seal one of Australia’s biggest takeovers of the year, an $18.7 billion tilt at Origin Energy, is hanging in the balance, facing a double bind of value and virtue.

Competition watchdog chair Gina Cass-Gottlieb is poised to decide on the virtue of the consortium’s efforts to overcome the competition conflicts that the sale of Australia’s second-biggest gas and electricity supplier will pose for the country’s energy markets. And at least two respected former competition commissioners think trusting Brookfield’s virtue will be a big ask.

Brookfield has outlined ambitious plans to spend another $20 billion to $30 billion on renewable energy projects.

Brookfield has outlined ambitious plans to spend another $20 billion to $30 billion on renewable energy projects.Credit:

The high stakes play for Origin began last November when the electricity retailer opened its books to Brookfield and MidOcean after they lobbed a surprise $9-a-share bid to buy the company and divide its assets between them.

Origin’s board eventually accepted an $8.91 a share offer in a deal structured to increase the bid price by 4.5¢ a month if completion is delayed beyond November 30, valuing Origin now at $18.7 billion, including debt.

Under the deal’s terms, Brookfield will end up with Origin’s power generation and retailing division, which supplies about 4.5 million customer accounts. MidOcean Energy – a liquefied natural gas company formed by US-based global energy investor EIG – will acquire Origin’s interest in a Queensland LNG joint venture, Australia Pacific LNG.

To sweeten its offer and counter competition worries, Brookfield has outlined ambitious plans to spend another $20 billion to $30 billion on renewable energy projects, adding 14 gigawatts to the grid and turning the “gentailer” into Australia’s biggest green energy provider by 2030 – a clear public good given the urgency and billions needed to transition the country’s fossil-fuel-dominated grid to more planet-friendly energy. Without the Canadian’s capital, Origin’s renewable plans are far more modest, a 4 gigawatt expansion over the same period.

Brookfield’s big numbers command attention and are likely to be factored into any regulatory decision. All the same, the deal has the Australian Competition and Consumer Commission worried.

Even if Brookfield ringfences each energy business as promised, the businesses will still be answerable to one owner.

Within a short timeframe, Brookfield has expanded its reach deep into the country’s energy sector. Last year, it gained control of electricity transmitter AusNet, marshalling funds from Sunsuper and a host of Canadian pension funds. It also holds a half share of smart metering business Intellihub.

In the regulator’s eyes, if the deal goes through, there’s a slim chance AusNet may be tempted at some future stage to either hinder Origin’s competitors or give its stablemate sweetheart deals when connecting its promised shiny new renewable assets to AusNet’s network, particularly in Victoria where AusNet owns the state’s 6000 kilometres of high-voltage poles and wires.


Potential conflicts don’t stop there. MidOcean, too, already has interests in Australia. Its minority ownership of another coal seam gas company, Queensland Curtis LNG, is proving thorny, given it could share competitively sensitive pricing and contract information between it and Origin’s LNG business.

Even if Brookfield ringfences each energy business as promised – housing them in separate offices with independent technology, boards and management teams – the businesses will still be answerable to one owner manager. And the watchdog will never be entirely sure the Canadian’s behavioural undertakings around internal separation are truly working, nor will it have the resources to police them.

“Whatever their decision, it’s extremely unlikely they [the ACCC] will accept a management and business separation model. There are too many chinks in these arrangements. They won’t buy that,” says former ACCC commissioner Allan Fels.

Graeme Samuel, the competition tsar for eight years until 2011, is also sceptical. “Behavioural undertakings that rely on internal processes that are not subject to public view are notoriously difficult to police. Back in my time, we found them to be generally unsatisfactory and unacceptable,” he says.

Brookfield will also be sweating on recent merger decisions.

ANZ’s bid for Suncorp was scuppered because it crimped competition in Queensland, and Telstra and TPG’s desire to share regional mobile networks was scotched by the regulator and the Australian Competition Tribunal on appeal.

The takeover is also up against a wave of value-motivated Origin investors.

AustralianSuper, Origin’s biggest shareholder, took the highly unusual step last week of broadly telegraphing it had increased its stake in Origin by 1 per cent, taking its total shareholding to 13.68 per cent.

Not satisfied with a simple ASX notification, the super giant delivered a blunt message to Brookfield and MidOcean in a media statement that declared: “Origin’s current share price is substantially below our estimate of its long-term value and this is why we have increased our holding in the company.”

AustralianSuper is not the only investor calibrating the deal price.

Others suggest Origin’s shares are worth more than $11, about 20 per cent higher than the price proposed in the binding agreement between the parties made in March. The board’s unanimous recommendation to shareholders that they accept the offer – made during turbulent times for the sector – is being undermined by the retailer’s rejuvenated earnings power and a better outlook for generators.

Macquarie analyst Ian Myles points to Origin’s partly owned UK-based affiliate retailer, Octopus Energy, as the sleeper asset driving it’s improved earnings and value.

In a further twist, he says the company’s future earnings may rely for longer on coal. He maintains it will have no choice but to extend the life of its major coal generator Eraring, which it intends to shut down by 2025 seven years ahead of schedule. The 2880-megawatt facility on NSW’s Hunter region provides 20 per cent of the state’s power.

If the generator closes early, “[Origin] it will end up short both capacity and energy in a particularly tight NSW market at a time of El Nino,” he says.

October 10, the date the ACCC makes its decision, looms as crucial for the consortium and Origin’s shareholders who will ultimately decide the deal’s fate.

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