Green is good: How the AGL bid could set off a wave of climate themed takeovers

Billionaire Mike Cannon-Brookes is not the first person to mount an unexpected takeover bid for AGL.

Thirty-six years ago, feared corporate raiders Gary Weiss and Ron Brierley (who was last year jailed for possessing child abuse material) orchestrated a silent coup of the country’s largest energy company.

By exploiting legal loopholes that allowed them to bypass laws that would force them to disclose the acquisition of a major shareholding, the duo accumulated almost half of AGL’s share register, without the company or the public, knowing about it.

“We turned up one day and said we owned 41.5 per cent of the company,” Weiss says. “Everyone went into a hell of a spin, including the state government which threatened to do all sorts of things. No one could believe that we had acquired such a significant holding without anyone picking it up.”

At the time, the investors thought AGL was massively under-valued.“It was an absolute treasure trove, cheap as anything,” Weiss says. “Our goal was to get board representation and then essentially look to liberate the clear value that was there.”

Weiss and Brierley would come to haunt the country’s complacent company directors after a series of high-profile hostile takeovers during the 1980s changed the game for corporate governance and profit-seeking.

While each deal was headline-grabbing, colourful and dramatic, they were executed by largely the same playbook – identify a struggling company, typically with distressed assets, acquire shares or take it private, replace the leadership and overhaul the strategy, which would hopefully, improve returns.

Cannon-Brookes and Brookfield’s joint-bid to fully acquire AGL this week for $8 billion represents a green-tinged twist on the hostile takeover of the 1980s.

While the bid was quickly rejected by the board, the investors seem determined to press ahead, and told the Financial Times if negotiations with the board fail they’re prepared to go hostile, bypassing the board and approaching shareholders directly.

The consortium wants to shut down AGL’s coal-fired power stations within the next ten years, in a strategy that Cannon-Brookes says is necessary to save both the planet and AGL shareholders.

Cynics say the deal was merely a publicity stunt, with a price tag so low it was insulting and idealistic. But the approach could also signal the next chapter in the evolution of activist investing – with climate change concerns at the centre of it.

Beyond divestment

As climate change has become central to investment decisions, climate-focused investment and advisory firm Pollination’s executive director Zoe Whitton says the tools to agitate for change have changed.

In the early days, climate-aware investors would either use engagement, retaining a stake in a company to push for better practices, or divestment, making a public scene about dumping a stock for failing to meet demands.

“The conversation 10 years ago was, ‘Do you own it? What do you buy or sell?’,” she says. “But today there is increasing use of hostile initiatives – green shorting, takeovers.”

Activist investors increasingly use shareholder votes, litigation and the media to push their demands. And it’s working. Last year, a small hedge fund Engine No.1 dealt a major blow to oil giant ExxonMobil when it unseated two board members and replaced them with directors keen for change. This came in the same period as a Dutch court ordered Shell to slash emissions after a legal bid by a consortium of activists and Chevron suffered an investor revolt over its emissions targets.

Whitton expects the old world energy giants will be among the first takeover targets in this next phase of climate activism, with other sectors, including transport and industrials, to follow.

“You’ll see a sophisticated ability to identify a weakness in a company and to pounce often coming through in sectors where there is change occurring quickly, distressed assets and a need for strategic reorientation,” she says. “Our expectation is there will be more and more of what you might consider hostile, or very active, approaches from investors in a broader set of sectors.”

In recent years, hundreds of billions of dollars have flowed into green themed investments, including funds that aim to actively participate in decarbonisation.

Whitton says the trend is gaining pace because there is money to be made. Accelerating a company’s decarbonisation plan will unlock trillions of dollars in global capital, from those investors with ESG (environment, social, governance) mandates that ban investment in fossil fuels, and position the company for long-term growth while protecting it from headwinds such as carbon pricing or taxes.

While Cannon-Brookes brought star power to the AGL bid, Brookfield brought the firepower. Whitton says activist investors are most successful when backed by institutions, as with Engine1’s attack on Exxon which had support from BlackRock, Vanguard and State Street.

Brookfield launched a $US7 billion ‘global transition fund’ last year targeting investments that “accelerate the global transition to a net-zero carbon economy”. The fund is headed by Mark Carney, former Bank of England governor, who delivered a speech in February last year where he stressed the role of the private financial sector in decarbonising the world. “Today is all about action,” he said.

As the major banks rule out lending for thermal coal companies on climate grounds, these energy giants may instead need to turn to the deep pockets of institutional investors for equity to finance transition strategies.

Australian Investment Council chief executive Yasser El-Ansary says the industry stands ready and willing to assist, describing the AGL takeover bid as a “case in point” for the value of private capital in the race towards net zero.

“At the end of the day, one assumes there is ultimately a money making goal here, otherwise why would one be doing it?”

Famed investor Gary Weiss

“It’s an irrefutable fact that private capital investment enables businesses to do things that otherwise might not be possible,” he says.

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El-Ansary, a leading private capital lobbyist, can talk at length about the benefits of privately run companies over listed entities – they escape rigorous disclosure regimes, quarterly reporting, market expectations and dividends that force management to focus on short-term profits. “You simply don’t have the same pressure in an unlisted environment.”

However, El-Ansary says there are two key advantages that can really transform a company. “Financial horsepower, deep pools of capital that can be injected into the business to make that business genuinely transformative,” he says. “And secondly, strategic prowess that doesn’t always exist in a public company environment.”

“When you combine those two things together, it can be a powerful force for transformation and change,” he says. “It can accelerate the pace of change and private capital investment is a massive catalyst.”

Large public companies in old world industries are often guided by executives with specialised skill-sets. El-Ansary explains when a company is taken private, the new owners can overhaul management and boost investment in technology to ensure the company has the right leadership to guide the transformation.

“You can dial in different skill sets in the management team and board of directors level that have all the right skills to support the growth horizon for the business,” he says. “You can be very agile in the way you manage the governance of the business.”

El-Ansary says Australia’s abundant supply of natural resources has bred complacency among the country’s top business leaders.

“We haven’t really had our backs against the wall in a burning platform type moment that many other economies around the world have had,” he says. “We have been very lucky as an economy for a very long time. That’s bred a degree of latency in the way we respond to changes in markets, and community expectations.”

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“We have catching up to do. The role of private capital will help us accelerate that catch up.”

Prime Minister Scott Morrison and Energy Minister Angus Taylor were both quick to criticise the AGL bid. However, El-Ansary says their antipathy is misplaced.

“I don’t think it’s right for governments to signal to the market that an accelerated pace of change is a bad thing. The private sector is stepping in and saying, ‘We’re going to own this problem, we’re going to solve it, we’re going to do it quickly and efficiently’. I think the government should be really supportive of that.”

“Increasingly we run the risk of being left behind when it comes to other highly competitive, agile economies.”

Ten-year blocks

IFM Investors’ Kyle Mangini oversees billion-dollar investments in unlisted infrastructure projects around the world on behalf of the country’s largest industry superannuation funds.

Mangini recently orchestrated the acquisition and privatisation of Sydney Airport and agrees there are benefits to private ownership “at the margins”.

“Listed companies need to have a stronger story around quarterly results and returns and profitability. It’s harder for them, given the public nature of being listed, to prioritise decarbonising over returns. Private owners can take a longer-term view and think in 10 year blocks instead of three month block,” he says. “But I don’t think it’s a huge difference necessarily.”

Mangini says there needs to be a profit motive for acquiring a company, listed or otherwise, and altruistic ambitions to reduce carbon emissions cannot drive the deal.

One source, who could not speak publicly, predicted the key motivation for the AGL bid was not climate action but rather an opportunistic move to tap into the company’s extensive book of retail clients. AGL will soon be split in two, one company owning its green assets, the other owning its fossil fuels. The source said there is likely to be a number of suitors wanting to take over “good AGL” and Cannon-Brookes and Brookfield want to beat them to it.

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This is a position that Weiss agrees with. He says hostile takeovers are best targeted towards under-valued companies held back by poor management and legacy assets.

Weiss concedes AGL matches this description, claiming the company is “a “mere shadow of its former self”. But he’s adamant good intentions are not driving the latest takeover bid. “At the end of the day, one assumes there is ultimately a money making goal here, otherwise why would one be doing it?”

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