Spotlight: decarbonisation and M&A

03/04/2023

The following chapter of Gilbert + Tobin’s Takeovers + Schemes Review 2023 focuses on decarbonisation.

Chapters:

2022 saw a number of high profile public and private M&A proposals in which decarbonisation was a key consideration. Given various proposed government reforms – climate change / safeguard mechanism, gas price caps and incentives for renewables and electrification – and the move away from fossil fuels, we expect decarbonisation and electrification to be a key ingredient in M&A in the coming years. That said, we do not see decarbonisation as the sole or key driver, but rather more of an important consideration. Ultimately, we would expect any successful deals to have to be based on sound investment factors.

Australian companies continued to focus on climate change matters in 2022, in particular their net zero strategy. This was driven by the newly elected federal government’s focus on Australia’s net zero commitments (which included passing legislation to implement these commitments as well as further reforms which will be the subject of much debate) and Australian regulatory (ACCC and ASIC) focus on climate change disclosure (particularly greenwashing). Investors continued to concentrate on climate change matters, including as part of ESG due diligence which is becoming increasingly common in M&A transactions.

A number of high profile public M&A proposals in 2022 had decarbonisation and / or electrification as a key consideration. This included the Brookfield / Grok Ventures proposal to acquire AGL, the Brookfield / EIG proposal to acquire Origin Energy, the Skip Capital / Stonepeak Partners proposal to acquire Genex Power and BHP’s proposed acquisition of OZ Minerals.

While private M&A is not the focus of this publication, Squadron Energy’s acquisition of CWP Renewables is another M&A transaction in 2022 for which decarbonisation was a key consideration. This follows other high profile renewable energy M&A transactions in 2021 including PowAR and Mercury NZ’s acquisition of Tilt Renewables, Royal Dutch Shell’s acquisition of Meridian Energy and AC Energy’s acquisition of UPC Renewables.

Not surprisingly, of the five decarbonisation M&A proposals four of them were in the energy sector (AGL, Origin, CWP and Genex). Interestingly, three of them involved bidders who are high profile Australian billionaires with strong interests in decarbonisation (Mike Cannon-Brookes (Grok Ventures), Scott Farquhar (Skip Capital) and Andrew Forrest (Squadron Energy)) with perhaps less to lose if these investments do not go to plan in the short to medium term.

While only OZ Minerals / BHP resulted in a binding public M&A transaction in 2022, there may be more to come in 2023 (for example, Origin Energy is still ‘in play’ at the time of writing). That said, the federal government’s proposed climate change / safeguard mechanism and gas price caps along with inflation and higher interest rates may pose a challenge to decarbonisation M&A transactions in 2023.

M&A proposals in 2022
#	Target	Proposed acquirer	Transaction type	Approximate Value	Status
	AGL	Brookfield / Grok Ventures	Takeover (NBIO)	$4 billion	Unsuccessful
	Origin Energy	Brookfield / EIG	Takeover (NBIO)	$15.3 billion	Ongoing
	Genex Power	Skip Capital / Stonepeak Partners	Takeover (NBIO)	$320 million	Unsuccessful
	OZ Minerals	BHP	Scheme	$9.5 billion	Binding offer
	CWP Renewables	Squadron Energy	Private treaty M&A	$4 billion	Successful

Brookfield and Grok Ventures takeover proposals for AGL

As discussed in our 2022 Review, in early 2022 a consortium of Brookfield / Grok Ventures (which is owned by tech billionaire Mike Cannon-Brookes) made two non-binding takeover proposals to acquire AGL Energy at modest premiums to the AGL share price. These proposals were made as an alternative to AGL’s proposed demerger of its electricity generation and retail assets. As part of the proposal, the consortium announced that they intended to execute a transition plan at AGL that would require approximately $20 billion of capital to fund the transition of AGL’s generation fleet. This would involve replacing 7 GW of capacity through a build-out of at least 8 GW of clean energy and storage, so that AGL would achieve net zero by 2035. The transition plan would bring forward AGL’s target for net zero by 12 years and close down AGL’s remaining coal power stations 15 years earlier than AGL’s proposed timelines.

Each proposal was quickly rejected by AGL’s board of directors on the basis that it materially undervalued AGL, was not in the best interests of AGL shareholders and AGL’s proposed demerger would deliver better value for AGL shareholders. While Brookfield / Grok Ventures put pens down and did not make any further proposals, there were further steps in this dance.

Mike Cannon-Brookes went on to hold an 11.28% interest in AGL (via a combination of equity swaps and collar loans) with the goal of blocking the proposed AGL demerger. In May 2022, AGL withdrew the proposed demerger and AGL’s Chairman and CEO each resigned. In the following months, Mr Cannon-Brooke nominated four directors to the AGL board and, contrary to the AGL board’s recommendation to vote against three of nominees, all four nominees were approved by shareholders in November 2022.

Among other things, it seems that AGL’s board of directors had underestimated Mr Cannon-Brookes’ tenacity as a climate change activist investor and the growing importance of climate change matters to its shareholders, potentially ahead of (arguably old fashioned) pure financial return considerations. The failed AGL demerger demonstrates that public company directors should carefully engage with all stakeholders (including climate change activist investors) when pursuing transactions that involve sensitive climate change issues. That said, we recognise this is easier said than done.

Brookfield and EIG’s proposed acquisition of Origin Energy

In November 2022, a consortium of Brookfield Asset Management and EIG made a non-binding, indicative offer to acquire Origin Energy by way of scheme of arrangement. If the proposed acquisition is successful, Brookfield would own Origin’s electricity and gas retail and supply business and EIG would own Origin’s 27.5% stake in Australia Pacific LNG (APLNG). Around the time of the proposal, Brookfield publicly announced a commitment to spend $20 billion to fund Origin’s transition plan to clean energy by building renewable energy capacity and storage infrastructure if the offer is successful.

The Brookfield / EIG proposal followed the two rejected proposals by Brookfield / Grok Ventures to acquire AGL (discussed on page 34) and EIG’s proposed acquisition in 2021 of a 10% stake in APLNG from Origin (which failed due to Conoco Philips exercising pre-emption rights). The failures of the AGL and APLNG transactions were likely a key catalyst for Brookfield / EIG’s proposed acquisition of Origin Energy.

By comparison to AGL, it would seem that the Origin board of directors engaged with Brookfield / EIG in relation to their proposal in a more open and welcoming manner and, following Brookfield / EIG increasing their proposed offer price, provided a period of exclusivity and due diligence to the consortium. The Origin board’s approach to bidder engagement was undoubtedly shaped by the implications for AGL and its directors of not engaging with Brookfield / Grok Ventures in relation to their proposals to acquire AGL and the failure of AGL’s proposed demerger. That said Brookfield / EIG did have to bump its original offer price and the premium of 54.9% to the pre-bid trading price offered by Brookfield / EIG was healthy by any measure.

The Origin takeover proposal however has been complicated by the federal government’s proposed domestic gas price caps, as well as debt market conditions which have made it more difficult for bidders to secure acquisition funding. At the time of writing, Brookfield / EIG have substantially completed due diligence and made a revised proposal of $8.90 cash per share, a reduction from the original offer of $9 per share. The revised proposal of $8.90 comprises $8.90 per share for the first 100,000 shares held by each Origin shareholder and for shares above that threshold, $4.334 per share plus US$3.194 per share (equivalent to A$8.90 per share on current exchange rates). The Origin board have noted in their announcement that they consider this revised proposal to deliver significant value to shareholders and intend to progress discussions with Brookfield / EIG, including negotiation of a scheme implementation deed. The US dollar consideration is interesting as a method of hedging the bidders’ foreign exchange risk and passing it to shareholders.

Skip Capital and Stonepeak Partners proposed acquisition of Genex Power

In July 2022, a consortium of Skip Capital (owned by Scott Farquhar) and Stonepeak Partners (an American private equity firm) made a non-binding, indicative proposal to acquire all the shares in Genex Power by scheme of arrangement. Genex Power is focused on developing a portfolio of renewable energy generation and storage projects across Australia. The proposal valued Genex at approximately $320 million. The Genex board of directors concluded that the proposal undervalued Genex and did not agree to provide due diligence to the consortium.

In August 2022, Skip / Stonepeak provided a revised proposal which valued Genex at approximately $346 million. Based on the revised proposal, the Genex board provided the consortium with due diligence on a non-exclusive basis to assist the consortium with making a binding offer. In December 2022, following due diligence Skip / Stonepeak decided not to make a binding offer.

Skip / Stonepeak had built a 19.99% stake in Genex before their approach in July 2022. The shares were owned by Skip entities but under a co-operation agreement between Stonepeak and Skip, the parties agreed that ownership of Genex would be 50/50 if the bid was successful. The co-operation agreement was terminated in December 2022 when Skip / Stonepeak decided not to proceed with a binding offer, which means that Stonepeak no longer has a relevant interest in the shares held by Skip entities.

It remains to be seen what Skip / Farquhar will do next as Genex’s largest (19.99%) shareholder.

BHP proposed acquisition of OZ Minerals

In November 2022, BHP made a revised non-binding indicative proposal to acquire 100% of the shares in OZ Minerals by scheme of arrangement. OZ Minerals’ board confirmed that it intends to unanimously recommend the revised proposal as being in the best interests of OZ Minerals shareholders in the absence of a superior proposal, subject to the parties entering into a binding scheme implementation agreement following completion of BHP’s confirmatory due diligence and an independent expert concluding that the revised proposal is in the best interests of OZ Minerals shareholders (which has now occurred). On 22 December 2022, BHP and OZ Minerals entered into a binding scheme implementation agreement.

At the time of making the proposal, BHP stated that the acquisition would add copper and nickel resources that are essential to support the global megatrends of decarbonisation and electrification. BHP’s chair also said that “BHP’s proposal would add value to BHP shareholders by increasing exposure to future facing commodities, attractive synergies and adding to our pipeline of growth options”. Therefore, while decarbonisation was not the only reason for BHP’s proposed acquisition of OZ Minerals, it forms a key part of BHP’s strategic rationale of the proposed acquisition.

Net zero commitments and the renewable energy transition

Since the Labor party came into power in May 2022, the federal government has proposed significant changes to Australia’s laws and policies to increase decarbonisation in Australia. The federal government will use a sectoral approach to address decarbonisation in Australia: the government expects that all sectors of the Australian economy will do their part to reduce emissions.

In September 2022, Australia enshrined an enhanced target of achieving 43% emissions reduction by 2030 (compared to 2005 levels) and net zero by 2050 through the Climate Change Act (Cth) 2022, along with consequential amendments to the objects and function of key Commonwealth agencies such as ARENA and the CEFC.

The federal government has also been consulting on key elements of its approach to the industrial sectors through the NGER Safeguard Mechanism – the safeguard reform measures are now well underway, with exposure drafts of key legislation and implementing rules out for review and a timetable which aims to see the reforms commence on 1 July 2023. If the reform package is passed, approximately 215 facilities across the mining, oil and gas, cement, aluminium and chemical industries will be required to keep their scope 1 (direct) GHG emissions below more stringent baselines which will decline in line with the national targets.

In December 2021, the Labor party announced the Powering Australia and the associated Rewiring the Nation plan. The federal government has sought to implement this plan since the Labor party came into power in May 2022. The Powering Australia plan is focused on “creating jobs, cutting power bills and reducing emissions by boosting renewable energy”. Australia is seeking to achieve 82% renewable energy by 2030. Implementation of this goal is driven by planned development of low emissions technology and infrastructure including clean hydrogen and low cost solar technology along with investment in underlying transmission and distribution infrastructure. Rewiring the Nation involves the deployment of $20 billion equally over the course of 3 years to deliver low-cost finance to upgrade, expand and modernise Australia’s electricity grid. This budget has since been deployed in part in concessional finance put towards the Marinus Link ($1 billion) and towards renewable energy zones in Victoria ($1.5 billion). Also supporting Australia’s renewable energy ambitions, the federal government launched its offshore electricity infrastructure regulatory regime in 2022, with NSW declaring its first renewable energy zone with offshore wind in December 2022. The Gippsland area in Victoria opened in early 2023 to applications from windfarm developers.

Climate change disclosure

In 2022, the growing importance of decarbonisation has seen increasing disclosure by Australian public companies regarding their net zero aspirations and initiatives.

The federal government is still developing Australia’s climate-related disclosure requirement regime, opening consultation in December 2022 around proposed mandatory climate-related financial risk disclosure requirements for certain companies (listed companies and / or companies above a certain size threshold). In lieu of a formal regulatory regime being implemented, climate-related disclosures are currently “governed” by misleading and deceptive prohibitions as well as other guidelines and standards.

2022 saw the first formal enforcement action taken by ASIC for greenwashing against Tlou Energy Limited in relation to claims made around certain projects in Africa. Subsequent enforcement actions have been taken by ASIC for greenwashing against:

Vanguard Investments Australia in respect to claims in the Vanguard International Shares Select Exclusions Index Fund PDS linked to tobacco exposure;
Diversa Trustees in respect of its Cruelty Free Super product; and
Black Mountain Energy in respect of its Project Valhalla having net zero emissions.

While each of these actions have been resolved through the payment of somewhat nominal penalties (infringement notices of $53,280, $39,960, $13,320 and $39,960 respectively), maximum fines for ASIC prosecutions are significantly higher and may be sought if Federal Court prosecutions are pursued.

Predictions for 2023 for M&A in the decarbonisation space

In 2023, we expect to see:

continued M&A with decarbonisation as a key factor, but not necessarily the key driver as the transaction will still need to satisfy financial criteria
target companies continuing to pursue net zero strategies, particularly in relation to renewable energy
target companies engaging more actively with climate change stakeholders including activist investors
greater shareholder activism on climate change matters, in particular energy transition. Not all activists will be focused on financial returns and considerations