February 20, 2022
Brookfield Renewable Partners L.P. Opening salvo for AGL Energy?
Our view: We believe that a bid for AGL Energy is consistent with Brookfield Renewable's strategy of providing a suite of energy transition services to various corporations and organizations. If the bid is eventually successful, we believe AGL will provide Brookfield Renewable (and its institutional partners) with significant decarbonization opportunities to deploy capital at attractive returns.
First impression:
Joint bid for AGL Energy. On February 19, 2022, a consortium led by Brookfield Asset Management (Brookfield), which includes Grok Ventures, made an unsolicited bid to acquire Australia’s AGL Energy (AGL). Unconfirmed media reports have indicated that Brookfield may shut down AGL's coal-fired facilities ahead of schedule and scrap AGL's demerger plans. The bid values AGL at A$7.50/share (~A$8 billion including debt), representing a 4.7% premium to AGL's last closing price of A$7.16. On February 21, the AGL Board rejected the bid, citing that it materially undervalues the company. Due to the nature of AGL's business, if the bid is eventually successful, we expect Brookfield Renewable to participate in the transaction (contributing ~25% of Brookfield's investment).
AGL has significant coal assets and a large customer base. AGL (covered by Royal Bank of Canada, Sydney Branch analyst Gordon Ramsay) is an integrated utility with interests in energy retailing, coal and gas-fired generation, and renewable energy (solar, wind, hydro and batteries). AGL is currently focused on scaling its energy, Internet and mobile services under the banner of connected essentials for its retail customers. AGL has ~4.5 million customers, including ~2.4 million electricity and ~1.5 million gas customers. AGL is planning to demerge the company into two independent ASX listed companies: AGL Australia and Accel Energy. AGL currently owns ~11.1 GW of power generation capacity, consisting of ~6.9 GW of coal, ~1.7 GW of gas and oil, and ~2.5 GW of renewables.
Brookfield can accelerate energy transition and leverage AGL's customer base. Brookfield Renewable has been focused on providing decarbonization services, and developing renewable energy and storage capacity. We believe that Brookfield Renewable can leverage AGL's customer relationships (e.g., corporate PPAs) to build out significant renewable generation and storage capacity, and phase out AGL's coal facilities ahead of schedule (AGL currently plans to close all of their coal facilities by 2045).
Shares of AGL have traded lower for the past 5 years. The share price of AGL peaked in Q2/17 at ~A$28, and troughed in Q4/21 at ~A$5, and most recently closed at ~A$7.16. AGL has a market capitalization of A$4.7 billion (February 18, 2022) and net debt of ~A$2.8 billion (December 31, 2021)