Breakfast Deals: AGL's upper hand

AGL Energy is on the cusp of seizing Australian Power and Gas, while Treasury Wine rumours circulate amid a pre-earnings blackout.

AGL Energy looks like it’s in the box seat to grab Australian Power and Gas, barring any curveball from the consumer watchdog. Meanwhile, Treasury Wine Estates is back in the business gossip pages (for basically the same old reasons), the RHG board has thrown its support behind a sweetened deal from Resimac and Virgin Australia has a German partner.

AGL Energy, Australian Power and Gas

It’s not impossible to envisage a scenario where AGL Energy would lose Australian Power and Gas to a rival suitor. But it’s difficult.

AGL announced yesterday that it has taken a 19.9 per cent stake in Australian Power and Gas and it intends to launch an off-market 52 cents a share takeover for the rest.

That values Australian Power and Gas at about $100 million and its 354,000 customers at $560 apiece. We’ll get to that later.

The target’s major shareholders Nippon Gas, The Cobra Group and the Poole Interests have given AGL its position and agreed to accept the takeover offer once it becomes unconditional in the absence of a superior proposal.

AGL has set a minimum acceptance condition of 90 per cent of the register, after which point you move into compulsory acquisition territory.

Amid rumblings of interest from other parties, Australian Gas and Power has established an independent committee to have a look at the proposal, which is a 33 per cent premium to the previous trading price and 51 per cent premium to the three-month, volume-weighted average price.

From a playbook perspective, this deal ticks all the boxes. Not only is it a compelling premium, but AGL has its foot on 19.9 per cent of the register – à la Archer Daniels Midland and GrainCorp.

The target will always say ‘in the absence of a superior offer’ without addressing the glaring fact that the suitor’s pre-emptive strike on the register makes a superior proposal much harder to execute.

Australian Gas and Power’s customers are valued at $560 each, which is a huge cut from the $1000-$1200 per customer that Origin Energy and TRUenergy paid during the New South Wales power privatisations of 2010.

The difference is that the customers AGL is after are considered to be substantially lower quality as far as churn and delinquency rates are concerned. AGL’s brand should help with the first issue.

The only major avenue where AGL might hit a roadblock is Regulator Avenue.

The Australian Competition and Consumer Commission is reviewing the deal, although it must be said AGL is confident that the proposal won’t run into any trouble with chairman Rod Sims.

In the aftermath of AGL’s acquisition of the Loy Yang A generator in Victoria, Sims said he’d have a close look at any proposals to further consolidate the electricity generation market.

This deal is different. Australian Gas and Power is a retailer and AGL picking up 350,000 customers from a higher churn operator would not constitute a significant consolidation in the market.

Treasury Wine Estates

Much of the speculation circling Treasury Wine Estates this morning in the wake of yesterday’s bad news isn’t helped by the fact that chief executive David Dearie is gagged in some respects by a pre-earnings blackout.

August 22 is the date investors will be noting down for some more details of TWE’s troubles in the US. In the meantime some are wondering whether it would be better if the American experiment first begun by previous owner Foster’s Group should come to an end once and for all.

Sell your US presence and concentrate on emerging markets. That’s theory and it’s been around for the TWE business for a long time.

Dearie said that selling TWE’s American business wasn’t on the agenda, but then again it was difficult for him to mount much of case for anything yesterday, so the speculation continues unabated.

TWE’s US crops could be worth $1 billion. But the focus on Australian agribusiness players, particularly those geared towards Asia, means it would become extremely vulnerable without it. Some even believe TWE is a target regardless.

Becoming a takeover target isn’t a bad thing or a good thing. But shareholders have to consider the reality that selling the US business for a short-term profit and some pain relief could easily lead to another short-term profit on the whole company.

What is TWE’s long-term value to the register? These are fundamental questions being asked without a single offer on the table for the US business and firm words from the chief executive that it isn’t up for sale. God bless corporate speculation!

As Business Spectator’s Stephen Bartholomeusz pointed out yesterday, the problem for TWE is that it’s portfolio in the US is biased towards lower end products. This means the long-awaited rebound in the US wine industry isn’t carrying the same benefits for TWE as it is for other operators, because much of the recovery is focused on higher end wines.

RHG, Resimac

The board of mortgage business RHG, once known to you and me as RAMS Home Loans, has thrown its support behind a sweetened offer from lender Resimac.

The improved 51 cents a -share offer includes 48 cents is in cash and 3 cents in dividends, valuing the company at $157.3 million.

RHG’s deal has won out over the late pitch from mortgage provider Pepper Australia. The rival was offering 46 cents a share and a 3 cent dividend.

RAMS was floated on the Australian sharemarket back in 2007, which proved to be incredibly poor timing. Westpac Banking Corporation snapped up the lender as the US subprime mortgage crisis wiped out the smaller players.

“RHG considers acceptance of the counter-proposal provides a positive result for RHG's shareholders,” the takeover target said.

Wrapping up

Virgin Australia has expanded its ‘virtual network’ into the land of poets and thinkers with a new codesharing and frequent flyer agreement with airberlin.

It’s easy to see the steps between Virgin’s recent dealings with 10 per cent shareholder Etihad, which is expected to reach for a greater slice of Virgin, and its new German partner. Etihad owns almost 30 per cent of airberlin.

In resources, Minotaur Exploration is poised to grab cash-poor junior Breakaway Resources in a friendly scrip takeover.

Shareholders in the Queensland-based junior will receive one Minotaur share for every 10 Breakaway shares, which is equivalent to a 33.4 per cent premium for its own stock.

Meanwhile, Dart Energy has offloaded its Chinese coal seam gas assets to a wing of China Oil HBP Science and Technology for around $US20.8 million ($22.7 million)

And finally the Byron Bay Cookie Company, which has been acquired by Australian pasta maker Rinoldi Group, will remain based in Australia according to The Australian Financial Review.