Origin soars following $18.4bn offer

Origin Energy (ASX: ORG) was up a whopping 37.6% at the open to $8.00 after the large-cap power and gas supplier received a surprise takeover offer, which assuming it proceeds, is shaping up to be the M&A deal of the year.

A consortium comprising Canadian giant Brookfield Asset Management and private equity firm MidOcean Energy have made a conditional and non-binding takeover offer, which at $9 a share values the company at $18.4bn.

Today’s offer follows an initial bid early August of $7.95 a share and is 54.9% above yesterday’s closing price of $5.81.

To the uninitiated, Origin operates Australia’s biggest coal power plant — Eraring in NSW and has a 27.5% stake in the Australia Pacific LNG (APLNG) project in Qld.

Board says yes

Assuming today’s offer shapes up into a binding bid, Origin’s board has already flagged plans to recommend the offer to shareholders.

However, the deal would still need to Foreign Investment Review Board (FIRB) clearance.

Origin chairman Scott Perkins believes today’s offer “confirms that Origin, its operations and management team represent a highly strategic platform, well-placed to benefit from the energy transition”.

Strengthened balance sheet

Meantime, Origin CEO Frank Calabria notes today’s offer marks one of the sector’s biggest buyout bids at a time of surging profits for the company’s gas business.

“We believe Origin is in a strong position to lead the energy transition, capture opportunities and create value for shareholders,” Calabria noted.

“Over the past year, Origin has executed a number of important strategic initiatives that have strengthened the balance sheet, sharpened our strategic focus and positioned the company to prosper from the energy transition.”

Split the business

It’s understood the consortium plans to carve up the business, invest an additional $20bn supporting the company’s transition to low-carbon energy and build renewable energy and firming generation capacity through to 2030.

Brookfield, which already has $80bn-plus investments in Australia, plans to take Origin’s core electricity and gas retailing and supply business.

Given its large-scale capital and global renewable power development expertise, Asia-Pacific CEO, Stewart Upson advised the market that Brookfield is uniquely placed to contribute significantly to Australia’s net zero targets.

“The energy transition in Australia is a once in a generation investment opportunity but that investment needs to be accelerated materially in order to meet Australia’s legislated climate goals,” he noted.

Meantime, MidOcean - an LNG company managed by private equity player EIG - would acquire the integrated gas business which includes the prized APLNG export plant in Qld.

Energy transition

In what was seen as a precursor to today’s offer, EIG failed to buy Santos in a $13bn-plus deal back in 2018 and last October made a failed attempt to buy a 10% stake in the APLNG from Origin.

However, in a separate deal last month MidOcean acquired Tokyo Gas’ minority stakes in four LNG ventures in Australia.

Consortium partners believe Origin’s integrated gas business will build on MidOcean’s existing investment in Australia, and by supplying critical natural gas and LNG to the domestic and global markets for decades to come, enable broader decarbonisation efforts in the region.

Origin’s recent performance

Origin Energy reported a strong Integrated Gas performance in the first half, driving the company to upgrade its outlook to a breakeven in FY23 and FY24 and a profit of $0.35-0.55bn in FY25. 

Largely in-line with broker forecasts, revenues of $2.77bn in the September quarter were up 64% on the previous period in 2021, due higher realised oil prices.

What brokers think

While CLSA believes the consortium’s $18.4bn takeover bid is very likely to succeed, Credit Suisse reminds investors that FIRB hurdles may complicate matters.

It’s understood the competition regulator will on Friday hand down a recommendation for potential intervention in the gas market to treasurer Jim Chalmers.

Consensus on Origin is Moderate Buy.

Expect updates from Macquarie, UBS, Ord Minnett and Credit Suisse – which hasn’t updated since mid-August - over coming days.

Origin Energy share price over 12 months.