By Carl-Gabriel Jakobsson, Charlie Blidén (Stockholm School of Economics) and Ayushman Mukherjee, Junseok Choi, Matthew L, Amar Mian (University of Cambridge)
Photo: Jason Blackeye (Unsplash)
Overview of the deal
Acquirer: Brookfield Asset Management
Target: Origin Energy
Total Transaction Size: A$18.4bn
Closed date: TBA
Target advisors: Barrenjoey Capital (financial), Herbert Smith Freehills (legal)
Acquirer advisors: Citigroup, J.P. Morgan, UBS and MUFG
Origin Energy has backed an A$18.4bn ($11.8bn) buyout bid from a consortium led by Brookfield Asset Management in a deal that would make it the largest of its kind in Australia this year. If approved, the acquisition would be one of the largest private equity-backed buyouts of an Australian firm. Brookfield and its partner, MidOcean Energy, see big opportunities in Australia to invest in the transition to cleaner energy. Brookfield's Asia Pacific CEO, Stewart Upson, said the acquisition would support Australia's multi-decade transition journey and accelerate its progress toward its emissions-reduction targets. Brookfield views it as a "once in a generation" opportunity to invest in the global energy transition. This third offer at A$9 a share constitutes a 55% premium. The board of Origin Energy has unanimously recommended shareholders to vote in favour of the bid. The proposal will need approval from the Australian Competition Consumer Commission and Foreign Investment Review Board to proceed further.
Company Details (Acquirer - Brookfield Asset Management)
Brookfield Asset Management is a leading global alternative investment company that owns and operates assets for its shareholders and clients. The company focuses on real estate, renewable power, infrastructure, and private equity. It has several business segments, including Asset Management, Residential Development, and Corporate Activities. The Asset Management segment manages the company's listed partnerships, private funds, and public securities.
Founded in 1997, headquartered in Toronto, Canada
CEO: James Bruce Flatt
Number of employees: 150,000
Market Cap: CAD $95.4bn (as of 13/12/2022)
EV: CAD $47.7bn
LTM Revenue: CAD $11.5bn
LTM EBITDA: CAD $2.8bn
LTM EV/Revenue: 4.1x
LTM EV/EBITDA: 17.0x
Company Details (Target - Origin Energy)
Founded in 2000, by the demerger of Boral Limited led to the formation of a separate energy business. Origin Energy is a leading Australian integrated energy company in the utilities sector with 4.2 million electricity, gas and LPG customers. The company’s segments include Energy Markets, Integrated Gas and Corporate.
Founded in 2000, headquartered in Sydney, Australia
CEO: Frank Calabria
Number of employees: 5,000
Market Cap: A$12.5bn
EV: A$15.4bn
LTM Revenue: A$14.5bn
LTM EBITDA: (A$335bn)
LTM EV/Revenue: 1.1x
LTM EV/EBITDA: n.m.
Projections and Assumptions
Short-term consequences
If the deal is successful, the combined company will utilise Origin Energy’s assets to seize opportunities in the transition to clean energy in the Australian market by closing down Australia’s largest coal-fired power plant and divesting their integrated gas business to MidOcean. Origin’s subsidiary Australia Pacific LNG (APLNG) together with two additional Liquefied Natural Gas (LNG) export companies, are on the front to redirect gas into the Australian home market by boosting supply and thereby lowering prices. The Australian government is currently having ongoing discussions about implementing a price cap on gas to support businesses and citizens against the increased energy prices partly caused by the ongoing Ukraine-Russia war.
After the offer was announced, Origin’s stock price initially rose 40%, stabilising at ~35% at a closing stock price of A$7.83 when the market evaluated the risk associated with a deal this size in the energy sector which currently, with the ongoing energy crisis, is under a lot of attention. Furthermore, approval from the Australian Competition and Consumer Commission (ACCC) and Foreign Investment Review Board (FIRB) is a prerequisite for the deal to go through. When the offer was raised to a per share price of A$9, a premium amounting to 55%, Origin announced that it will advise shareholders to vote in favour of the offer as long as no superior offer appears. Additionally, Brookfield Asset Management will raise its per share proposal by A$0.03 per month if less than 75% have voted in favour of the deal by May 15th 2024 which is required for the deal to proceed.
Long-term Upsides
The Australian government has set itself ambitious climate targets – aiming to reduce emissions by 43% by 2030 compared with 2005, and achieving net zero emissions by 2050. Allens, a law firm, believes that this will usher in a new era of policy reform, private capital investment, technology advancement, and an overhaul of network infrastructure – the result being that Australia’s energy industry is set to change more in the next 10 years than it has in the past 100.
Brookfield’s acquisition of Origin Energy aims to ride this wave. The deal is being pursued through the Brookfield Global Transition Fund I, the largest fund in the world focused on the energy transition – and aims to decommission existing thermal assets, and build new clean generation for the benefit of all stakeholders.
Despite principally being an LNG developer, Origin will play a crucial role in the energy transition. Fossil fuels will play a crucial role in stabilising prices in the energy market by providing peaking power during periods of elevated demand. Origin aims to pivot to the clean energy sector in the next decade, with Brookfield pledging $20 billion by 2030 to fund their transition plan by building renewable energy capacity and storage.
Risks and Uncertainties
All takeovers require permission to proceed from Australia’s Foreign Investment Review Board (FIRB) and the Australian Competition and Consumer Commission (ACCC).
There are concerns about anticompetitive practices emerging from Brookfield’s ownership of Australian energy delivery services business, AusNet. AusNet is a diversified energy network company, which owns and manages electricity transmission networks in Victoria. The ACCC states ‘The ACCC is awaiting a submission in due course, and expects to conduct a public review that will carefully consider any likely competitive impacts resulting from the proposed acquisition’.
FIRB is less of an approval issue due to Brookfield already owning Australian companies, such as AusNet. However, Saul Kavonic, Credit Suisse analyst, has concerns that Jim Chalmers, Treasurer of Australia, may leverage the approval process for Origin to make certain obligations, following government pressure to reduce gas prices.
There is litigation risk from a company called Tri-Star Group. Tri-Star Group’s claim against APLNG is continuing in supreme court, challenging reversionary rights triggered in 2008 by APLNG and further that APLNG are underpaying royalties. The value of the reversionary interest is 20% of APLNG’s reserves, and the claim of underpayment of royalties is $250 million, increasing monthly. Tri-Star’s Australia manager, Andrew Hackwood, said recently that the company is "confident of its contractual rights and will continue to pursue the litigation".
"Together, Brookfield and Origin can support Australia’s multi-decade transition journey and accelerate our progress towards its emissions-reduction targets". "Our business plan includes additional investment of A$20 billion by 2030 to build the required renewable capacity and storage and position Origin as Australia's leading ‘greentailer’" - Stewart Upson, Brookfield's Asia Pacific CEO