agls origin bid could turn hostile

AGL's Origin bid could turn hostile
Geoffrey Newman
January 06, 2007

ENERGY company AGL may have to put cash on the table to win over a tentative Origin to its merger proposal.
Analysts have identified up to $1.5billion in possible savings on corporate overheads in a combined group.
Responding to the proposed merger of Australia's two biggest energy companies, investment bank UBS said they might need to sell half of the combined group's energy customers in Victoria and South Australia - or $1.2 billion in accounts - to appease the Australian Competition & Consumer Commission.

The competition watchdog might also be concerned about upstream competition issues in Queensland, where Origin dominates the gas market. The view that AGL and Origin will not be able to merge without offloading substantial numbers of customers appears to be universal.

However, analysts at Citigroup estimate the savings in corporate overheads from combining the two companies could be worth $1 billion to $1.5 billion, which would add between 7 per cent and 11 per cent to their combined market capitalisation.

UBS estimates the merger will be cashflow-neutral for a combined group.

Victorian power company TRUenergy indicated yesterday it could be a buyer of assets that AGL and Origin might have to sell. TRUenergy intended to participate in the "inevitable" consolidation of the Australian energy industry, managing director Richard McIndoe said.

"The AGL-Origin proposal faces challenges in obtaining ACCC clearance without diminishing the perceived economic upsides of the deal," Mr McIndoe said. "I expect the Government and regulators will have concerns about the potential for over-concentration of market share in key strategic markets, such as the Queensland gas market."

ABN AMRO estimates the merger will create about $1.2 billion of value in the new business, also assuming the sale of Origin's network assets, the sale process for which is already under way.

The investment bank said AGL would have to offer Origin better merger terms or make a takeover bid. AGL is offering a nil-premium merger, which would give Origin shareholders no more than they could get for their shares on the market.

"AGL Energy will need to transfer more value to Origin or go hostile," ABN analysts Jason Mabee and William Allott told clients.

Analysts at Goldman Sachs JB Were, which is advising AGL, said a combined share and cash bid was likely.

Origin shares rose 10c to $8.65 yesterday in a weak market after falling on the day of the announcement. AGL shares rose for a second day, up 18c to $16.93.

Analysts also suggested the merged company might sell Origin's 51 per cent stake in New Zealand's Contact Energy.

Goldman estimated that AGL could raise as much as $5.45 billion for a takeover bid, including $2.5 billion it would recoup from the sale of Contact Energy. Any shortfall could be made up with a scrip issue.

The Australian Securities Exchange again declined to comment yesterday on whether it was investigating trading in Origin shares after the share price began rising strongly a month before the merger offer was made public.

Additional reporting: Bloomberg

http://www.theaustralian.news.com.au/story/0,20867,21016977-643,00.html