Origin shareholders demand demerger, higher dividends in deal fallout

Origin Energy’s board is facing demands to consider a demerger, a beefed-up transition plan and higher dividend payouts after the collapse of a $20 billion takeover plan despite the support of a large majority of investors.

Kingfisher Capital Partners’s Ross Illingworth, who invests on behalf of high net worth families, said Origin needed to pre-empt any hostile takeover from its North American suitors Brookfield and EIG – or from another party – by returning cash and franking credits as dividends or buybacks.

Another investor, Allan Gray, has suggested Origin’s board consider a full separation between its energy markets business and the LNG business, while VanEck wants the company to come up with a faster plan to transition to clean energy, along with the funding plan to achieve it.

However, Argo Investments’ Jason Beddow said the board and management needed time now to digest everything that had happened after the almost 18 months since the bidders first approached Origin.

He advised against hasty decisions, particularly amid the broader policy uncertainty around the energy sector, with little clarity as yet on the impact of the federal government’s recently announced expanded Capacity Investment Scheme.

“Origin stays as Origin for now, and I guess the board and management are probably going to need a bit of time to reconvene and think about their next moves before they next talk to the market, probably at about the half-year,” said Mr Beddow, Argo’s chief executive.

“I think it just needs a little bit of digestion before there are any rash moves by board, management, shareholders or anyone, frankly.”

The comments from institutional investors came as RBC Capital Markets estimated it could cost Origin about $8 billion to replace the electricity that will be lost through the closure of its 2.88 gigawatt Eraring coal-fired generator, putting more pressure on the electricity and gas supplier to ramp up spending on the transition as a standalone company.

The $9.39-a-share takeover deal from Brookfield and EIG failed on Monday to secure the 75 per cent shareholder approval it needed to proceed amid resistance led by Origin’s biggest shareholder, AustralianSuper.

But AustralianSuper was far from the only institutional investor to reject the deal. Cbus revealed on Tuesday that it also voted against, while health and community services pension fund HESTA abstained.

The voting by Cbus and HESTA is unusual given all the key proxy advisers recommended voting for the takeover, as did Origin’s board.

But Cbus chief investment officer Brett Chatfield signalled the fund had similar concerns to AustralianSuper. “We did not consider that the proposal in regard to Origin Energy was attractive from a long-term return perspective and as a result voted against the proposal,” Mr Chatfield said.

Perpetual is also understood to have rejected the takeover, while Australian Retirement Trust, First Sentier and Catholic Super were among those that voted in favour.

The foundering of the deal scotches plans by Canada’s Brookfield to use Origin to pump between $20 billion and $30 billion into clean energy and storage investment in the National Electricity Market over the next 10 years.

Special dividend demand

Origin chairman Scott Perkins said that meant the company would be able to return to “business as usual”, given the strong shareholder support shown throughout the process in the company’s strategy.

But institutional investors, several of which voted for the deal, are making it clear they want to see additional action from Origin, either in the form of some restructuring or other measures after the failure of the takeover.

The proposal received almost 69 per cent support from shareholders at the vote on Monday, falling short of the required 75 per cent needed as Origin’s biggest shareholder, AustralianSuper, and some others rejected it.

Shares in Origin regained some of the ground lost on Monday, adding 2.2 per cent to $8.03, about 14.5 per cent below the rejected offer price.

Kingfisher’s Mr Illingworth said Origin’s board should declare it would stick with a 39¢ per share special dividend that was contingent on the takeover succeeding, and buy back shares on market to soak up loose stock from disappointed hedge and arbitrage funds that had hoped to make a quick profit, as well as upgrade the dividend payout ratio.

He said the board needed to make a gesture of goodwill to shareholders who have endured 14 months of uncertainty as Brookfield and EIG announced, then trimmed, and finally raised their offer to the $20 billion proposal voted down at Monday’s scheme meeting.

“I think they should proceed with that [special dividend] just as a goodwill gesture to get some franking credits out to this group of long-suffering shareholders that have put up with these comings and goings,” Mr Illingworth said.

He said they should also take advantage of the independent expert’s report valuing Origin shares at $8.45 to $9.48, as well as brokers’ consensus price targets of $9.05, and do an on-market buyback immediately.

“They should also consider that they’re now vulnerable to a hostile takeover offer from either EIG, Brookfield or someone else. They should go into defence mode by reviewing the payout ratio of the company, raising the dividend yield and getting the franking credits out to shareholders.”

VanEck portfolio manager Jamie Hannah, who said he was “disappointed but not surprised” at the vote outcome, said a return to “business as usual” at Origin was not enough and called for the board to come up with a faster transition plan, with the funding to support it.

Brookfield had planned to add 14GW of clean energy and storage capacity through Origin’s energy markets business over the next 10 years, much higher than the 4-5GW planned by the company by 2030, he added.

Support for board

Allan Gray’s Simon Mawhinney also backed the Origin board and the company’s chief executive Frank Calabria, despite the knockback of the deal that was recommended by directors.

“I think they have conducted themselves well, and I feel they have had shareholders’ interests front-and-centre of their minds, so I have no criticism for the board or management team,” he said.

“I think they are very good, and I hope they have the energy it will probably take to take Origin on its next journey, hopefully through a separation of energy markets and APLNG.”

RBC energy analyst Gordon Ramsay said funding Origin’s transition to low-carbon energy would be “challenging” without the takeover.

“We estimate it could cost $8 billion for Origin’s new suite of generation assets to replace the electricity produced by Eraring in FY23 (13.3 terawatt-hours), without consideration for the balance of plant or the available transmission line capacity,” he said in a note.

Australian Financial Review
5 December 2023


‘Buckley’s to none’: Brookfield faces defeat as Origin ditches Plan B

Brookfield and EIG face almost certain defeat at Monday’s Origin Energy shareholder meeting to decide the fate of their $20 billion scheme offer – with the unappealing choice of mounting a hostile takeover bid or walking away after their 13-month pursuit.

Origin’s board also faces difficult choices if it continues as a standalone ASX company, with some investors urging it to increase dividends and others advocating that it use its cash flows to accelerate its shift to clean energy, as Brookfield had promised to do.

Ross Illingworth, chief investment officer of Kingfisher Capital Partners, said Brookfield and EIG had “over-engineered” their bid by adding a complex Plan B to the original scheme offer of $9.39 a share after it became clear a week ago that proxy votes were running against them.

Origin shares fell 2.4 per cent to $8.20 on Thursday after the board formally rejected the Plan B alternative. The postponed November 23 scheme vote will still go ahead on Monday.  “The share price says it all today – Buckley’s to none is the market’s vote on it,” Mr Illingworth said. Kingfisher holds Origin shares for a network of wealthy family offices.

 He said many shareholders had accepted the bid is not going to get up and “moved on in their minds”, while some arbitrage funds – which buy into takeover situations to make a quick profit – “are probably quitting early, worried that it’ll go sub eight [dollars].”

Jamie Hannah, VanEck’s deputy head of investments, said: “We agree that Plan B isn’t a good plan for shareholders. While we support the original plan, we don’t think it’ll have sufficient support to reach the 75 per cent. 
“I don’t know what Brookfield will do from here – they could walk away or make a hostile bid.” 

Increase dividends’

VanEck and Kingfisher had voted in favour of Brookfield and EIG’s scheme bid, but have different expectations for Origin as a standalone company.
“Origin will be faced with increasing the payout ratio to improve the dividend yield and get the franking credits out and doing old-fashioned things and running the company on a standalone basis,” Mr Illingworth said.  Origin will also inevitably come under pressure to increase its decarbonisation and renewable energy targets.

Under Plan B, if the scheme were rejected, EIG would have bid $9.08-$9.33 a share for Origin, kept its Australia Pacific LNG business and sold its energy markets business to Brookfield for $12.3 billion.

Origin’s directors said this was incomplete, highly conditional and too complex to be put to shareholders, but continued to recommend investors vote in favour of the original scheme offer at Monday’s meeting.

In particular, they said the revised proposal required finalisation of funding arrangements, updates to regulatory approvals, rulings from the Australian Taxation Office and revised legal documentation.

“Following careful consideration, including obtaining advice from its advisers, the board considers the revised proposal is not in the best interests of Origin or its shareholders,” the company said.

“It is also the board’s view that the value of the revised proposal does not adequately compensate shareholders, including taking into account the extended timeline that the revised proposal would require.”

Origin said that if the vote on the existing offer was not supported by at least 75 per cent of ballots cast on Monday, its board and management would continue to execute the company’s strategy and “ambition to lead the energy transition in Australia”.

“Consistent with its duties, the board will remain open to strategic options that enhance shareholder value,” the company said.

‘Get rich quick’

AustralianSuper, which owns more than 17 per cent of Origin’s shares, has been steadfast in its opposition to the takeover proposals, but some institutional shareholders including Allan Gray and the Australian Retirement Trust are in favour.

The delay in the shareholder vote has given the Brookfield consortium more time to try to win over uncertain investors.

The current value of the Brookfield offer is $9.39 a share in cash to Origin shareholders based on Wednesday’s exchange rates, including a fully franked special dividend of 39¢ a share.

Former prime minister Paul Keating on Wednesday lambasted the proposed takeover as a “get-rich-quick” scheme that Australia needs “like we need a hole in the head” after Brookfield told potential co-investors that it could bring Origin Energy back to the stock exchange in as little as five years.

Mr Keating urged the Foreign Investment Review Board to knock back the takeover bid in the same way Canada blocked a $40 billion bid from BHP to acquire Potash Corporation of Saskatchewan on national interest grounds.

Faster transition under consortium

“What Brookfield is proposing is simply a pure private equity play,” Mr Keating wrote in The Australian Financial Review.

Mr Keating is an adviser to Lazard Australia, an investment bank engaged by AustralianSuper to assist it in its campaign to convince shareholders to reject the offer.

A Brookfield spokesman said on Wednesday that the consortium would be able to speed up Origin’s transition to renewable energy if it was successful in acquiring the company.

“To achieve its own plan, Origin will need to reduce dividends and do capital raises,” the spokesman said. “Brookfield is a long-term investor. Our ‘green build-out plan’ is a 10-year plan, and we will own Origin for [between 10 and 12 years] and invest up to $30 billion.”


Australian Financial Review
30 November, 2023



Van Eck backs in-doubt Origin takeover ahead of crucial vote

Origin Energy shareholder Van Eck says it will vote in favour of Brookfield and EIG’s $20 billion takeover offer, but has flagged that the company will have to accelerate its decarbonisation plans regardless of the outcome.

Proxy voting – those cast ahead of a meeting of shareholders to decide whether the takeover proceeds – were due on Tuesday afternoon, amid intense lobbying from Origin, its suitors and their advisers. Despite this, the market expects the takeover not to gain enough support.

Jamie Hannah, VanEck’s deputy head of investments, said it would be very difficult for the deal to get over the line with AustralianSuper, Origin’s largest shareholder, and Perpetual pledging to vote their near-20 per cent combined holding against it at Thursday’s meeting.

Van Eck holds 5.4 million shares, giving it a 0.3 per cent stake in Origin. The Brookfield-EIG offer, which is partly in US dollars, valued Origin shares at $9.43 apiece based on exchange rates late on Monday, Origin said.

But Mr Hannah said Origin would inevitably come under pressure to increase its decarbonisation targets from shareholders, the government and “everyone” – whether the deal went ahead or not.

 Origin’s climate action targets include 4 gigawatts of wind, solar and storage capacity by 2030 and a 20 million tonnes per annum reduction in its carbon emissions to 40 mtpa. Brookfield, the Canadian investment giant spearheading the bid, plans to spend $20 billion to $30 billion over a decade to build 14 gigawatts of renewables and storage.

“I think everyone’s demanding an acceleration of the decarbonisation and the energy transition. So regardless of [whether] this deal goes ahead, I think Origin has to make some changes to increase that number considerably from where they are,” Mr Hannah told The Australian Financial Review.

Mr Hannah said Van Eck had made its decision to support Brookfield and EIG’s revised offer because “we thought it offered good value for current shareholders” but a secondary reason was that “it was a better ESG [environmental, social, governance] vote”.

Based on Brookfield’s investment plans its offer was “three and a half times better off on the energy transition”, he added, and the Australian Competition and Consumer Commission “didn’t block it because they could see it was better for the energy transition”.

Van Eck submitted its proxy ahead of Tuesday’s deadline. Origin will not disclose how the proxies fell in aggregate until the offer goes to a vote at a meeting on Thursday. The $20 billion takeover needs 75 per cent of the shares cast to give it the green light.

Ross Illingworth, chief investment officer of Kingfisher Capital Partners, said the vote was “too close to call” and would be decided by 185 large shareholders holding about 78 per cent of the stock.

Kingfisher will “reluctantly” vote in favour of the scheme on behalf of the family offices it represents, Mr Illingworth said, adding that he was not too concerned about the outcome because Origin would remain a viable, dividend paying company if the offer failed.

AustralianSuper rejected an argument by activist groups who say it would be against the national interest for the Brookfield-EIG bid to fail because of its plans to sharply accelerate the energy company’s decarbonisation, and reiterated its belief that Origin can play a leading role in the energy transition in public or private ownership.

“As an investor with strong, long-term capital, where it makes sense, we are ready and able to support the company with this,” the $350 billion superannuation fund said via a spokesman.

“The fund is open to providing capital to assist Origin as it prepares to transition over the coming decades, while delivering on our net-zero commitment and our purpose to help members achieve their best financial position in retirement.

“The challenge facing the nation as we work towards net-zero by 2050 is not a lack of capital but rather a shortage of good quality investment opportunities. We remain committed to exploring any transition opportunities, including with Origin, that are aligned to the best financial interests of members.”


Australian Financial Review
21 November, 2023


Origin Energy shares dive as deal risks mount

Market confidence in the $20 billion takeover deal for Origin Energy has taken a dive after rebel shareholder AustralianSuper further increased its stake in the large electricity and gas supplier, cutting the chances of bidders Brookfield and EIG securing the investor support they need.

Origin shares dropped 3.2 per cent on Tuesday to $8.50 after AusSuper bought more stock, taking its holding to 16.5 per cent and making it even more difficult for the North American pair to get the required 75 per cent shareholder approval at next week’s vote.

But the decline in the shares since mid-October when they were trading at north of $9.25 has helped persuade some investors to drop their earlier opposition, keeping the possibility alive that Brookfield and EIG may still secure the 75 per cent shareholder approval that they need.

The bidders increased their offer by 8 per cent two weeks ago, and this week declared a fully franked special dividend if the deal is approved. The shares closed on Tuesday some 10.8 per cent below the sweetened bid price.

“The revised proposal is not quite what we want, but I guess we are getting a taste of the share price trading materially below what’s proposed, so we’ve got a taste of the downside,” said Ross Illingworth at Kingfisher Capital Partners, who had previously resolved to reject the offer.

“We’ve probably changed our position a bit, thinking through it, and I think there would be quite a few others in that camp as well.

“We’re probably now inclined to vote for it.”

Still, AustralianSuper is understood to have fielded multiple calls from other Origin shareholders looking to understand its stance, which is based on the belief that the $9.53 a share offer from Brookfield and EIG remains substantially below Origin’s long-term value.

One energy analyst said AusSuper’s positive view on Origin’s prospects in the transitioning energy market seemed to be gaining traction.

“It is increasingly recognised in the industry that AustralianSuper may have a point when it comes to the more bullish macro outlook and how well Origin is placed to take advance of the higher and more volatile prices that are ahead,” the analyst said.

They said Origin’s unique position in gas peaking power generation should provide healthy returns over the next several volatile years in the electricity market, while it is also poised to receive government support to keep its profitable Eraring coal power plant running. It also has green energy opportunities it can layer into its portfolio.

That suggests at least some shareholders will join AusSuper in voting against the scheme of arrangement at the November 23 meeting, despite the unanimous recommendation of the board. All three major proxy advisers have also recommended a vote in favour of the deal, and an independent expert has determined the offer price is slightly above the upper end of its valuation range.

Assuming only about 80 per cent of Origin shareholders vote, the deal will be rejected if shareholders representing at least 20 per cent of the stock vote against.

The possibility the deal will collapse has also raised questions in the market about what could happen next, with Brookfield and EIG having already stated they could immediately launch an off-market takeover bid. There are also questions around the future of the board and chief executive Frank Calabria if shareholders reject the deal they have recommended.

A shareholder notice filed by AusSuper on Tuesday showed the fund bought the additional shares at prices of between $8.41 and $8.93 each, with the biggest chunk of stock acquired on Monday at $8.65.

The renewed buying comes a day after Brookfield and EIG offered the industry fund the option of joining the bidding consortium but were swiftly rebuffed.


Australian Financial Review
14 November, 2023


Origin valuation stirs investors’ quest for higher offer

An independent expert’s valuation has given investors more leverage to argue for a higher price, despite the deal being deemed “fair and reasonable”.

 An independent assessment of Origin Energy’s $18.7 billion takeover offer from two North American suitors has strengthened shareholders’ leverage to argue for a higher offer, despite it being deemed fair and reasonable.

The expert hired by Origin to assess the offer, Grant Samuel, valued Origin shares at between $8.45 and $9.48 as at June 30. The range covers the offer price of about $8.81 a share from Toronto-based Brookfield and Washington-based EIG.

But in an unusual move, Grant Samuel noted that by the time the takeover is due to take effect, Origin shares could be worth 40¢ more. That would leave the offer price below the bottom end of the valuation range.The higher, “roll forward” valuation plays into the hands of Origin investors including its biggest shareholder, AustralianSuper, and others such as Perpetual that have signalled they regard the bid as too low given the improved outlook for Origin’s business.

The Origin board has already agreed to the offer price, subject to the independent expert’s valuation and no better deal emerging, leaving Origin shareholders in the box seat to press for more.

However, sources close to Brookfield have picked holes in the “roll forward” calculations, and point out that the existing offer sits well within the core valuation range. They say the valuation includes the latest information on Origin’s performance and its outlook, including the marginal improvement conveyed by chief executive Frank Calabria at Wednesday’s annual shareholder meeting.

At that meeting, retail shareholders also largely voiced opposition to the deal, mostly due to concerns about selling the company into foreign ownership. The deal has yet to get clearance from the Foreign Investment Review Board.

Price gap

Origin’s traded share price already implies pressure on Brookfield and EIG – which plan to split Origin’s assets between them – to sweeten their offer despite the absence of a rival bidder. The bidders raised their offer twice last year before their approach was revealed to the market in November.

The price of Origin shares last week surged above the offer price for the first time after the merger received approval from the competition regulator, holding ground since.

Shares in Origin edged up as much as 5¢ to $9.26 before settling at $9.22, up 1¢.

In documentation released on Thursday, Origin chairman Scott Perkins noted the 40¢ gap between the traded price and the offer price, and cautioned that if the deal is voted down, Origin shares may drop.

But in his letter to shareholders, Mr Perkins also highlighted Grant Samuel’s “roll forward” valuation, which lifts the bottom end of the valuation range to $8.85 a share by December 18 – the implementation date – assuming a 10 per cent return on equity.

AusSuper last month increased its stake in Origin to 13.68 per cent, saying the share price was “substantially below” its long-term value estimate. Perpetual and Kingfisher Capital Partners have said the offer is too low given the improvement in the market outlook and other factors, including the rapid growth in Origin’s partly owned UK affiliate, Octopus Energy.

Macquarie Equities last month suggested the offer needed to be closer to $10 a share. It reiterated its view on Thursday that “a bump will be necessary to secure approval”.

The deal requires 75 per cent shareholder approval at a vote set for November 23.

AustralianSuper declined to comment on Thursday, but Kingfisher portfolio manager Ross Illingworth maintained his view that Origin is worth more than Brookfield and EIG are offering.

“I’ll be recommending the clients vote against it – I am very concerned that Brookfield and EIG are going to make a lot of money and we’re not,” said Mr Illingworth, whose firm represents self-managed super funds, investment companies, charities and high net worth individuals.

“Markets are dynamic and unfortunately for the offerer, the dynamics have changed rapidly over 11 months. We don’t want to transfer material and wholesale value across to an offerer on the cheap.”

Grant Samuel described the valuation of the major electricity and gas suppliers as “both challenging and subject to considerable uncertainty”, citing factors including the pace of the energy transition and the timing of coal plant closures.

It put a value of between $9 billion and $10 billion on Origin’s energy markets business, which includes power generation and energy retailing, with 3.5 million customer accounts.

Origin’s 27.5 per cent stake in the Australia Pacific LNG project in Queensland was valued at between $6.89 billion and $7.51 billion, or up to $33 billion for the whole APLNG venture including debt. It assumed a long-term oil price of $US60-$US65 a barrel.

The valuation for Origin’s 20 per cent stake in Octopus came in between $2.25 billion and $2.45 billion, based on an enterprise value of £5.7 billion ($10.9 billion) to £6.2 billion.

Investors and analysts have been keenly awaiting the valuation of Octopus, which has experienced significant growth in customer numbers and in its licensing business since Origin bought its interest in May 2020.

Grant Samuel noted “clearly a significant degree of upside potential” in Octopus, and that the future value of Origin’s stake could be substantially higher if growth projections are met. But it added it was important to recognise that its discounted cash flow valuation incorporates significant growth over the next few years, and that the business is “not without risk”.

Origin’s total equity value was put at between $14.6 billion and $16.4 billion, giving an enterprise value including debt of $18.12 billion to $19.91 billion.

Australian Financial Review
19 October, 2023

Origin’s profit surge inflames bid debate

A big improvement in profits in Origin Energy’s energy markets business and a further increase this coming year has drawn criticism over electricity tariffs and revived a debate whether the $18.7 billion Brookfield-led takeover offer still represents good value.

Origin expects earnings in its energy markets business to further improve this year before a softening in electricity profits as tariffs finally turn south.

Origin Energy CEO Frank Calabria said operational performance was strong in 2022-23. The updated guidance came as the giant electricity and gas supplier posted a better-than-expected profit for the year ended June 30, with core net profit surging 83.5 per cent. Net income swung back into the black and topped $1 billion after a loss the previous year due to write-downs.

The rebound in profit was attacked by the Australian Council of Trade Unions, which accused Origin of failing to promptly pass on savings to consumers from a drop in the costs of purchasing energy. The lower costs were partly due to government caps on coal prices.

But Origin chief executive Frank Calabria defended the profit, noting the company’s big loss in the 12 months to the end of June last year and its investments in projects to underpin the transition to lower carbon energy.

“We’ve returned to a profit that is still a very modest return on capital, we’re not even achieving our cost of capital,” Mr Calabria said.

“It’s important for a company that is delivering the transition that they continue to invest in it, which we are,” he added, pointing to Origin’s investments in a large battery at the Eraring generator site in NSW, in hydrogen, renewables and other areas.

Kingfisher Capital Partners executive director Ross Illingworth, an investor in Origin, said the company’s improved profits were starting to make the $8.91-a-share takeover bid from Brookfield and EIG look out of date.

“I can’t see how a conservative independent expert is going to look us shareholders in the eye and say the offer is fair or reasonable,” he said, in comments that add fuel to a debate that took hold earlier this year over whether the bid still represents good value for shareholders.

Mr Calabria said the issue of the bid value was “a matter for shareholders”, noting an independent expert’s assessment of the transaction is underway.

“If they get through the regulatory approvals and we get to that point, then shareholders will have an opportunity to vote at that time,” he said.Allan Gray portfolio manager Suhas Nayak said Origin’s improved guidance “shows a continuation of the turnaround in energy markets after a dismal year or two before this one”.

But he said the return on capital for energy businesses more broadly, not just Origin, has been “woeful” for the last decade, which also had to be taken into consideration when it comes to criticism of its profits now.

Origin declared a final dividend of 20¢ a share, up from 16.5¢ a year earlier. The shares rose 1.8 per cent to $8.51.

Underlying full-year profit rose to $747 million, beating consensus by about 9 per cent. Net income was $1.06 billion, up from a loss of $1.43 billion the previous year. Earnings improved across the business, including a bigger-than-anticipated turnaround in profits at partly owned Octopus Energy in the UK.

“The outlook for [this financial year] is for further growth in energy markets underlying EBITDA, with Australia Pacific LNG production expected to rebound and cash flow remaining strong,” Mr Calabria said.

“Looking further ahead to FY2025, we expect electricity gross profit in energy markets to be lower than FY2024.”

Mr Calabria said on a conference call that the outlook for energy markets profits this year had brightened in the past few months. This, however, meant a likely drop between FY2024 and FY2025.

For this coming year, gas margins are expected to be weaker, while Origin’s share of profits from Octopus, now the UK’s second-biggest electricity retailer, would likely decline, he said.