Origin Energy: Takeover excites but approvals aren’t guaranteed

Author name:: By Max Vickerson
Job title:: Analyst
Date posted:: 11 November 2022, 7:00 AM
Sectors Covered:: Industrials, New Energy

Brookfield and EIG have launched an indicative, all-cash, takeover bid for Origin Energy (ASX:ORG) at $9ps which the board will recommend following a due diligence period.
The deal is subject to FIRB and ACCC approvals which adds some risk given tight energy markets. Investors appear to be factoring this in as the stock closed at (login to view).
We maintain our HOLD rating given the large amount of regulatory uncertainty that was already present before the bid arose.

Event

ORG announced the $9ps non-binding indicative takeover offer today and disclosed that there were also two previous bids from the consortium. The first bid was $7.79ps (ex-div basis) on 8 August which was then subsequently increased to $8.70ps - $8.90ps on 18 September. The board will unanimously back the current offer following an 8 week exclusive due diligence period.

The price of the offer will be adjusted for any dividend paid by ORG before implementation. The consortium has also agreed to a 3cps per month increase in the price if implementation is not complete before 15 May 2023.

The deal is subject to FIRB and ACCC approval as well as a shareholder vote. Other key regulatory issues like gas price caps or potential “super taxes” have also not been resolved and could influence the takeover negotiations in the future.

Investment view

It’s clear that the consortium has been interested in pursuing ORG’s assets for some time and is prepared to pay a premium for it. It’s interesting that the offer price has increased even as the regulatory environment becomes more hazardous for energy companies.

Despite the enthusiasm of the buyers and the potential 15% bid premium to today’s closing price we retain our HOLD rating due to the uncertainty in regulatory approvals being granted.

Price catalysts

Completion of the 8 week due diligence period.
Regulatory approvals.
Emergence of a superior bid.

Risks

Successful completion of the takeover offer including conversion to a binding offer, receipt of regulatory and shareholder approvals.
Availability of fuel, generation performance and renegotiation of Eraring fuel contracts.
Commodity prices (oil, gas, electricity, coal, carbon).
Energy markets regulation.
Interest rates.
Tax regimes.

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