Fully Committed

BROOKFIELD TAKEOVER 

Need To Know

• Scheme Implementation Deal signed with Brookfield and EIG. Implementation due early 2024.
• Proceeds now contain higher AUD, lower USD component. Equates to A$9.01 at spot AUDUSD vs prior bid at $A8.91. 
• Implied low double digit total return, including dividends from current share prices. 

Binding Scheme documents have been signed between Brookfield/ EIG consortium and Origin Energy. The proceeds now include a higher AUD component at A$5.78/per share (prior A$4.33), and an additional US$2.19/per share (prior $3.19). This reduces the exchange rate risk that that investors must face.  There is scope for Consortium to further lower the USD component by ~A$0.38 per share.

Key Features

• Fully franked dividends are payable, noting that ORG has very low franking credit balance. Dividends reduce the total proceeds payable upon completion. Franking credits are on top. 
• Timing: Consortium needs various levels of regulatory approval before heading to shareholders. Implementation is expected in early 2024.
• Ticking fee: Shareholders will receive an additional A$0.045/per share if the deal is not closed by 30 November 2023.
• Material adverse changes: Number of key operating clauses including the upkeep for Eraring (NSW) power station, damage to infrastructure, continued receipt of payments from key customers, and maintenance of asset values for APLNG. Interestingly, a change in laws/regulation is only mentioned in generic risks section. 

ACCC/FIRB Approval

Competition and Foreign Investment Review Board (FIRB) approval remain key tests for the Consortium in our view.

EIG has agreed to sell 2.49% of their stake in APLNG to Conoco, which would allow Conoco to be an upstream operator, marketing agent and services provider to APLNG. 

In our view, this is to help appease the FIRB, given APLNG will be the largest supplier of gas to the domestic market in few years. A US asset manager operating the largest supplier of gas to Australians would likely have raised FIRB concerns in our view. 

There remains some risk that ACCC will be concerned around Brookfield’s existing ownership of Victorian electricity distribution assets, which may require some divestments from Brookfield.  

Investment View

So where to from here for ORG? Brookfield is very motivated to acquire Australian utility and infrastructure assets after passing on AGL Energy (AGL) last year, ORG is now firmly in its sights.

In our view, the ~$8.90 price is a knockout price for ORG, despite the two earnings upgrades the company has pushed through since December. The Federal Government’s proposed legislation to influence gas project returns, has the potential to impact the cash flows from ORG. Despite this risk, Brookfield and EIG are fully committed to acquiring Origin Energy.  

Various approvals need to be secured before going to a shareholder vote later this year. Approvals from the ACCC and FIRB remain the most contentious. We would not be surprised to see the ACCC require some small asset divestments to gain approval, whilst FIRB approval remains a little bit of a lottery. 

Low double digit total return prospects into 1Q24 implementation date keep us on a Buy rating for now.