Inside Origin’s $18.7b game of M&A bluff

Brookfield-EIG’s bankers are asking investors what they’re thinking on value and getting pie-in-the-sky answers. They tell them their client is already stretched to the limit, and limped to the finish line to sign the binding agreement back in March. They are dealing with an unwieldy consortium that cannot change direction on a whim.

There is ample hot air and posturing on both sides, which is all part of the M&A game.

Offshore funds circling

The curious thing about this takeover battle is it is not between two suitors. Australia’s ding-dong battles of the past decade – Asciano, Warrnambool Cheese & Butter – have been bidding wars. This one is Brookfield-EIG versus Origin’s investors with no counter bidder in sight.

The situation has attracted global attention. Big offshore funds that try to make a quick buck on M&A deals have swooped in realising Brookfield in particular is on the hook and hungry to sign a globally significant deal for its energy transition fund.

These funds were initially scared by Australia’s changing gas regulations (now settled), the oil price (partly settled, partly favourable), currency risk (improved) and the competition regulator (settled). Now it is game on.

One of them, Texas-based HBK Capital Management, flew in for Origin’s annual general meeting last week to get the lay of the land, according to people at the AGM, and held talks with other investors and advisers.

Like-minded funds involved include Swiss fund PSquared and global players DK and Millennium, according to those watching Origin’s share register.

They’ve been bombed with requests to meet Brookfield-EIG’s advisers in the past week, since the independent expert’s report landed. The report valued Origin at $8.45 to $9.48 a share at June 30, but said a roll-forward valuation to December would add another 40¢ to the bottom of the range (arguably 44¢ at the top).

In meetings, these investors will say Origin is worth $10 or more a share. The bankers, paid by Brookfield and EIG only if the deal gets done, will point to the share price which has drifted from $9.30 back to $9.10, showing the heat has come out of the $10-plus target.

Who’s bluffing? Time will tell. Yes, those funds are not buying at up to $10, but Brookfield and EIG also haven’t declared their current bid “best and final”. Until they do, everything is a negotiation.

There is also plenty of bickering about Grant Samuel’s report.

Two things keep coming up: its valuation of high-growth UK software business Octopus Energy, including the discount rate applied and forecast customer numbers, and oil prices assumptions underpinning APLNG’s valuation.

Both sides argue the valuation is wrong, albeit for very different reasons. That is also part of the high-stakes game.

AusSuper keeping mum

As the November 23 scheme meeting approaches, two investors are likely to swing the vote.

The first and biggest is AustralianSuper, owner of a 13.7 per cent stake, which made it absolutely clear it thinks Origin is worth more than the bid price. It has maintained a silence since last month, when it was buying stock at as much as $8.69 a share.

The quickest way for Brookfield-EIG to shore up the transaction would be to agree a price with AustralianSuper and declare that offer best and final. Everyone would know where the main players stand.

But AusSuper has $2 billion invested and thinks Origin is the number one way to play Australia’s energy transition. It isn’t rolling over cheaply, and knows the kind of outsized returns Brookfield in particular is trying to make on its investment and generous ruling it received from the ACCC.

The second is Perpetual, which has close to a 3 per cent stake and was first to declare its hand publicly. It has weight in the market beyond the size of its shareholding. The other pocket of known dissent is stockbroker Angus Aitken, who also likely has a few votes in his camp and reckons Origin’s advisers are asleep at the wheel.

Brookfield-EIG need 75 per cent of votes cast their way at a scheme meeting to buy Origin. That’s a high hurdle.

They are likely to have the support of Origin’s passive investors – the biggest are Vanguard, BlackRock, Norges and State Street – which account for about a 15 per cent stake and will vote in line with proxy reports. Proxy firms are expected to recommend clients approve the deal; they typically look at takeovers from a process perspective, rather than valuation.

Brookfield-EIG should also get the bulk of the retail vote, given Origin’s board has recommended the bid. Retail owns about 40 per cent of the shares.

But that still leaves Brookfield-EIG and its camp of underlying investors short of a sure thing, hence the widely held view it needs to increase its offer.

Typically, increases either come quickly (which hasn’t happened) or two weeks or so prior to the vote, to give shareholders and proxy firms ample time to consider a new offer.

Could it all fall in a heap? Of course. But Brookfield and EIG will not go down without a fight.