Origin Energy: Brookfield Consortium’s Takeover Cleared by Regulator

The Brookfield consortium’s takeover of no-moat-rated Origin Energy ORG has been cleared by the Australian Competition and Consumer Commission. Origin plans to provide a scheme booklet, including an independent expert’s report, in the coming weeks. We estimate the takeover price is a little over AUD 8.80 per share, based on the current AUD/USD exchange rate. We maintain our AUD 8.80 fair value estimate, which comprises an AUD 8.50 stand-alone valuation and a small takeover premium. After a 4% increase today, the share price sits about 3% above the implied takeover price, suggesting the market expects Brookfield to increase its bid. We too think a better offer is needed given the paltry premium to our stand-alone valuation.

The ACCC concedes the acquisition may result in anticompetitive behavior and higher prices for consumers in Victoria, given Brookfield would have unprecedented market power by combining its existing electricity distribution and transmission network with Origin’s electricity retail and generation businesses. By controlling the electricity networks, Brookfield may be able to obstruct competing generators from connecting to the grid, and upgrade and operate the electricity grid to favor its own generation. Given Brookfield’s track record of squeezing farmers on its monopoly rail track in Western Australia, we think consumers should worry.

However, the risk is worth it, the ACCC thinks, because Brookfield says it will hasten Australia’s renewable energy transition and reduce carbon dioxide emissions faster than would otherwise occur. This argument seems flimsy to us, given Brookfield can easily invest in renewables without owning Origin. Additionally, we doubt the renewable transition can accelerate significantly given constraints from the slow pace of transmission network upgrades and shortages of labor and components.