Why Origin Energy shares are falling despite the higher takeover bid

The consortium led by Canada’s Brookfield put forth its best and final offer for Origin Energy (ASX: ORG) at $9.53 per share, up 7.1% from the prior offer ($8.90) and a 5.1% premium to its closing price on Wednesday ($9.07). 

Origin’s top shareholder AustralianSuper rejected the prior offer earlier this week, with the view that it was “substantially below our estimate of Origin’s long-term value.”

Raising the stakes

Brookfield’s takeover offers to date have been a mix of Australian and US dollars (less any dividends paid by origin before the takeover is implemented).

The prior offer was A$5.78 and US$2.19 per share. It’s worth noting that:

• At an exchange rate of 70 cents, the bid values ORG at $8.90 per share

• At an exchange rate of 64 cents, the bid values ORG at $9.20 per share

The revised offer is A$6.59 and US$1.86 per share. At the current exchange rate of 63.3 cents, it values ORG at $9.53 per share.

The story so far

I interviewed Jason Teh – Chief Investment Officer at Vertium Asset Management – back in August about Origin’s FY23 results as part of Livewire’s August reporting season coverage.

Back then, the most intriguing thing about Origin Energy was how it was trading at a 5-8% discount to the initial takeover bid.

“How is this not free money,” I thought to myself. A few days later, Teh provided some scenario analysis about how the trade offered a ~5% return with almost zero downside risk.

The trade offered “a decent 5% return for a 3 month wait with close to zero downside risk. Importantly, there is a free option on higher returns on the increased chance that the Consortium raises their takeover offer,” he said.

Fast forward to October, I spoke to Teh again about what a revised takeover would look like. In summary:

• “Brookfield offered to pay about a 20x PE multiple in late 2022, which was a good price to pay for control. But because of the takeover offer, Origin’s share price was unable to reflect its outstanding FY23 result back in August.”

• “It’s unlikely that Brookfield consortium will offer 20x PE multiple again on the higher earnings base.”

• “A compromise could be reached if the PE multiple was within the range of 15-17x. A reasonable takeover price range could be $9.90 to $11.22.”

Why Origin shares are falling on Thursday

Contrary to what normally happens when a company receives an improved takeover offer, Origin Energy shares opened lower on Thursday, down around 1% to $8.97 in early trade. 

The weakness in share price reflects the increasing likelihood that Origin shareholders will reject the revised $9.53 per share offer. The new offer is sweet, but it’s not that sweet, especially when you take into consideration the above multiples.

The AFR notes that "several other institutional shareholders were also demanding the offer be improved, with some suggesting a price exceeding $10 a share would persuade them to accept."

The deal requires a minimum 75% support from the votes cast at the upcoming shareholder meeting on Thursday, 23 November. Will $9.53 per share be enough to satisfy shareholders and major shareholders like AustralianSuper? 

For now, Origin shares are falling to reflect the increasing likelihood that it will no longer be bound by a takeover bid as this was Brookfield’s best and final offer.