It’s prime time for hostile takeovers of dirty energy assets.
As the world turns its focus to the Russian invasion of Ukraine, another tectonic shift with global implications is playing out in Australia. Green investors are looking at a laggard power company as a takeover opportunity.
Picture the scenario: AGL, a publicly listed energy company with revenues of just over $9 billion, is struggling with trying to transition most of its old, dilapidated coal-burning power stations to renewable energy – a scenario playing out the world over. AGL emits an incredible 6% of Australia’s total carbon footprint, more carbon than Sweden, Ireland or New Zealand.
Now imagine this: In 2017, Australia’s treasurer, conservative Josh Frydenberg, made calls to AGL board members, not to insist the company speed up emissions reductions but for it to sack its CEO, American Andy Vesey. Vesey had been hired to navigate the company’s coal transition and by all reports was doing just that. So well in fact that he was apparently moving too fast for the pro-coal government and, after the phone calls, abruptly left the company and returned to the U.S. A year later, Prime Minister Scott Morrison publicly demanded AGL keep its aging Liddell coal plant for an additional 20 years despite its derelict state. This is an incredible intervention by a government in a publicly listed company. Some have called it bullying.
Markets, not policy, are driving the move from coal to renewables.
Now add to this brew the Murdoch media, Australia’s biggest media owner, relentlessly parroting pro-coal rhetoric with cries of “save the jobs!” “Power prices will skyrocket!” and “China will take over!” Add a pinch of pro-coal union whinging and a climate crisis – what’s an energy company to do?
In strictly market terms, there is no arguing against retiring aging coal plants and replacing them with far less expensive renewable energy and battery storage. With operating costs soaring and renewable energy prices dropping, it is also more cost-efficient to put a plant out of its misery before it reaches the end of its life, as Germany recently did with its Hamburg-Moorburg coal power station, which has been online for only seven years.
Markets, not policy, are driving this change, which particularly matters in countries like Australia where government policy is going in the opposite direction. In the global marketplace for power, the cost of electricity from utility-scale solar photovoltaics fell 85% between 2010 and 2020 and continues to drop. With Australia now producing 30% of its power from renewable sources, it has some of the cheapest electricity in the world.
“I have the luxury of not being a politician so I get to speak in facts and science and economics, not fables and stories.”
Now enter the pony-tailed, climate-concerned Australian billionaire Mike Cannon-Brookes, co-founder and CEO of Atlassian, his vehicle Grok Ventures, and his newest partner, Brookfield Asset Management with an incredible offer. This week, the Cannon-Brookes Brookfield consortium offered to buy AGL for A$20 billion (just under US$15 billion) to transform the company’s aging energy generation fleet. The partners made a preliminary, non-binding offer of A$7.50 per share, or A$5 billion, and said the buyout would create more than 10,000 jobs and reduce national energy prices.
“I have the luxury of not being a politician so I get to speak in facts and science and economics, not fables and stories,” Cannon-Brookes told a gobsmacked media. The country’s leading financial newspaper, the Australian Financial Review (AFR) said the deal was “so shocking, so seismic that it’s hard to wrap your head around.”
As Tim Buckley, Director of Climate Energy Finance Studies, says it’s no coincidence that Brookfield, whose directors include global climate finance guru Mark Carney, is in this deal. With almost US$700 billion in assets under management, Brookfield has raised a sizable transition finance fund for just this sort of exercise.
[This is] one of the largest carbon abatement projects globally today.
And they have done the numbers. According to Buckley, a 1GW coal plant running 60% of the time generates more than 4 million tons (Mt) of CO2 emissions each year so cutting the operating life by a decade saves 40Mt of emissions. At the current EU carbon trading price of Euro90 per ton, this is worth over US$4 billion in emissions. Meanwhile, an old 1GW coal power plant has a market value today of close to $0 with massive rehabilitation costs added in. As Cannon-Brookes said at the time of the offer, taking over AGL with a plan to retire its polluting coal plants early offers one of the largest carbon abatement projects globally today.
So how did the audacious Cannon-Bookes take over plan come about and why is it important? Cannon-Brookes is Australia’s third-richest person and a self-made success story. Having made his fortune with the development of a collaborative software system now worth A$100 billion and used by more than 68,000 organizations including NASA, Tesla, eBay, Twitter and SpaceX, he is sensibly concerned about the decades-long failure of his government to address climate change. He’s not shy about talking to the media and has decided to put his money where his mouth is.
In 2017 he teamed up with mining magnate and ambitious green hydrogen developer Andrew “Twiggy” Forrest on the Sun Cable project, a plan to develop large-scale renewable energy in northern Australia and cable the electricity to Singapore.
See our related story, Australia’s Richest Industrialist says Fossil Fuels are Dead.
And Brookfield should not be underestimated. It’s one of the world’s most successful renewable energy infrastructure investors over the last two decades. The asset manager has almost 6,000 power generating facilities producing over 20,000 megawatts of energy from wind, solar, hydro and other renewable technologies in North and South America, Europe, India and China.
“To have a material impact on net zero transition, investors need to do more than simply avoid carbon-intensive businesses,” Brookfield managing partner and Asia Pacific chief executive Stewart Upson said. “We need to be willing to tackle emissions head on.”
The AGL board summarily rejected the offer on the day it was made saying it “materially undervalues the company on a change of control basis and is not in the best interests of AGL Energy shareholders.” But this is a board that has overseen the loss of 80% of AGL’s market value in just five years.
Cannon-Brookes says he is “optimistic” about the AGL deal. While there are regulatory challenges, these are not insurmountable and AGL is not in a position of financial strength.
“The company does not have the capital to fund the transition.”
In 2021, AGL management announced unimpressive financial results and plans to reduce operating costs by A$150 million, as well as selling off A$400 million in non-core assets by June 2022. The company then announced plans to split off its bulk power generator and establish a new carbon-neutral energy retailer within a year. There is speculation that the generator, with its massive rehabilitation costs, would struggle to survive, potentially leaving taxpayers to pick up the bill. The board’s decision to stop paying special dividends to shareholders sent its stock price plummeting.
“The company does not have the capital to fund the [coal to renewables] transition,” Cannon-Brookes said.
Meanwhile, Prime Minister Morrison, with the unspoken threat of sending in his henchman, responded to the ALG offer with, “Let me be really clear … We need to ensure that our coal-fired generation of electricity runs to its life because if it doesn’t, electricity prices go up, they don’t go down.”
Former head of the Australian energy regulator Kerry Schott bluntly fired back with an op-ed stating categorically that Morrison is “wrong” and that, “There is no reasonable case on power price and supply grounds for any veto of the Brookfield/Grok Ventures takeover bid by the government.”
So much for Morrison’s conservative government being the party of economic credibility.
So what does it say for other companies and other countries? Canada and the U.S. face similar political challenges in transitioning their energy systems and economies off of fossil fuels. With the International Energy Agency’s announcement that there can be no new fossil fuel projects to keep warming below 1.5 degrees and the remarkably low cost of renewable energy, the transition can and should happen more quickly than expected.
The GFANZ will mobilize a tectonic shift in global capital.
Financial mechanisms are now emerging to enable that process, particularly in developing countries. The World Bank’s Energy Transition Mechanism is a case in point. Momentum is growing to provide funding to help developing countries skip past polluting energy and close existing coal post COP26. As Buckley said, most of the U.N.-sponsored Global Finance Alliance (GFANZ) pledges for 1.5 C degrees have, as yet, no credible plan for implementation so countries, along with investors, are looking for all opportunities to fund the transition where it can have a climate and financial benefit.
“The very limited remaining global carbon budget would benefit from accelerated coal power plant closures everywhere,” Buckley said. “And the GFANZ will mobilize a tectonic shift in global capital to the tune of $100 trillion, to quote BlackRock’s Larry Fink.”
Companies lagging behind the coal transition, and governments lobbying to keep fossil fuels going, will be watching the AGL buyout saga as a litmus test for what may well kick off a coal buy-out trend for green investors around the world.