Mike Cannon-Brookes takes stake in AGL, plans to derail demerger

Tech billionaire Mike Cannon-Brookes unveiled a major stake in AGL Energy after market close on Monday in a bid to block management’s plans to demerge the energy giant’s coal assets into a separate company.

A note published to the ASX revealed the Atlassian co-founder is now AGL’s (ASX: AGL) largest shareholder with an 11.3% stake acquired via his private investment company.

Cannon-Brookes declared he would vote against management’s plan at the upcoming annual general meeting, calling it “flawed” and destructive to shareholder value. He added that the plan would do little to cut emissions and leave spun off coal-fired assets stranded.

“We have purchased this substantial interest in the company because we fundamentally believe there can be a better future for AGL,” Cannon-Brookes said in an email to the board on Monday.

“A future that delivers cheap, clean and reliable energy for customers. A future that accelerates the transition to net-zero, and a future that creates opportunities for AGL and value for its shareholders along the way.”

“We firmly believe the proposed demerger is a flawed plan that will fail to achieve these goals.”

Shares in AGL dived sharply at the opening bell, falling by as much as 3.4% before closing the day down 3.1%.

The stake opens a new front in Cannon-Brookes’ public campaign to change how AGL Energy responds to climate change and the energy transition. Management knocked back two takeover bids from the billionaire environmental campaigner and his partner Canadian Asset Manager Brookfield earlier this year that proposed spending up to $20 billion to accelerate the energy company’s transition to renewable power.

Morningstar senior equity analyst Adrian Atkins backs management's demerger plan, which would split the company into two entities, an energy retailer and an energy generator.

AGL’s board acknowledged Cannon-Brookes had written of his intention to vote against management at the annual general meeting and reiterated that the “proposed demerger is in the best interests of AGL shareholders.” The vote requires 75% shareholder approval and is scheduled for June.

“AGL remains committed to progressing the proposed demerger with a view to achieving implementation by 30 June 2022 and a responsible transition of Australia’s energy system,” according to a statement published before the opening bell on Tuesday.

Management also announced it had inked a $2 billion deal with global investment manager Global Infrastructure Partners to help fund a pipeline of clean energy projects post demerger.

Competing visions for AGL’s future

The ongoing standoff between Cannon-Brookes’ and AGL centres on management’s plan to turnaround the company’s flagging fortunes and ready Australia’s oldest energy generator for a world where wind and solar trump coal.

Management intends to spin-off AGL’s 4.5 million customer energy retailing business as “AGL Australia”. It will retain its electricity generation assets, including a fleet of coal-fired power stations, in a renamed “Accel Energy”. Accel will retain a 15% to 20% stake in AGL Australia.

Existing shareholders will receive one share in each business for each AGL Energy share they own.

Cash flows from Accel Energy’s low-cost coal plants are planned to help fund a gradual transition to renewable energy. Coal generation is expected to be phased out by 2045, more than a decade after the date set by Cannon-Brookes and Brookfield in their February takeover bid.

Atkins says the demerger will turn AGL Australia into a takeover target for companies expanding into energy retailing, including Telstra, Ampol and Shell. Higher wholesale electricity prices, trending upwards since late last year, should also boost the earnings outlook for Accel, he adds.

Attacking the strategy in a public letter on Tuesday, Cannon-Brookes argued it would create “two weaker, interdependent entities that are more costly to run” and whose combined value is likely to be less than AGL’s today.

Accel Energy’s portfolio of coal assets would drive away potential lenders and leave the company unable to invest in renewable energy or pay for remediating polluted sites, he said.

Cannon-Brookes slammed plans for AGL Australia to initially source most of its energy from Accel as “globally irresponsible” and likely to keep emissions high.

“Sweating old coal plants which are expensive to run, and increasingly breakdown like we’re seeing today with Loy Yang A is not economical or responsible. It makes no sense...or cents,” he said.

AGL unveils clean energy deal

In an apparent riposte to accusations investors would shy from coal assets, AGL management announced on Tuesday a $2 billion clean energy partnership with global investment manager Global Infrastructure Partners.

The so-called “Energy Transition Investment Partnership” (ETIP) will see Global Infrastructure Partners take a 49% equity stake in a $2 billion investment vehicle targeting a slate of renewable and low carbon assets to be developed, owned and managed by Accel Energy post demerger.

Estimated at 2.7 gigawatts, the proposed assets would produce almost as much as Australia’s largest coal plant, Eraring Power Station, slated to be closed in 2025.

The seven proposals on the drawing board include batteries at the Liddell and Loy Yang coal plants and a 450 MW wind farm at Bowmans Creek in NSW. Management expects final investment decisions on the latter two projects by end of 2022. The rest will follow in 2023 and 2024.

Global Infrastructure partners, which co-led the bid to take Sydney Airport private, will pay $94 million for its stake, which includes a $40 million up-front cash payment to Accel.

The deal is subject to the completion of the proposed demerger.

“There was strong interest shown in ETIP by a number of globally renowned infrastructure investors, and we are excited to have selected Global Infrastructure partners,” said chief executive Graeme Hunt in a statement on Tuesday.

“If all the Foundation Projects in ETIP were to proceed, it would represent an investment of approximately $4.7 billion into the future of energy in Australia.”