Unconscionable profits

Dec 2, 2023
Global business Image: istock/ metamorworks

The Canadian private equity fund Brookfield’s bid for Origin Energy has the sole aim of delivering unconscionable profits to investors. But the rest of us have to know we are in the company of the masters of the universe and click our heels whenever we are given the cue from their obedient investment banks.

Origin is the largest energy retailer/generator in Australia. It is an effective public utility – privately owned. Its operations across the Australian landscape – with over 4 million customers – gift it a social licence.

Given its scale and investments in the energy transition, Origin is a key player in that transition – the country’s largest domestic growth sector.

It is an absolute standout, a sitter for social capital – social capital that Australia has plenty of. Like the $3.5 trillion in superannuation savings.

Indeed, given the long tenor of investments required to meet the needs of those entering retirement, a match is needed on the long-run asset side to anneal the superannuation circle.

Premium energy market assets, public licence assets, should be owned across the nation, broadly, by social capital alongside local investors.

Assets of Origin’s premium quality should not be sold to private equity investors and, worse, sold cheaply, only to be bought back five years later – with the sole aim of delivering unconscionable profits to equity fund investors.

Brookfield, which amplifies its proposal, has told all and sundry that any investment it has in Origin will be held in a closed-end fund; that is, with an initial public offering within five years.

So the proposition is, Brookfield buys a massive and key asset cheaply, only to offer it back to investors at a much higher price five years later.

What Brookfield is proposing is simply a pure private equity play: a profiteering private equity fund, looking to buy assets cheaply, using all sorts of corporate finance trickery, other people’s money, every lurk in tax minimisation, then punting assets the country needs back to investors, but at a higher price.

Roughly $25 billion has been spent on Australian renewables, M&A and development over the past three years, with a further $50 billion in identified future development related to these transactions.

Over that period, all Brookfield has spent on Australian renewables is fees paid to its local advisers to scoop Origin assets cheaply.

Brookfield and its agents hold out the prospect of investing $20 billion to $30 billion in renewables investment. But Brookfield told the ACCC that investment would be funded by ‘‘applying the profits of Origin’s energy markets’’. That is, Brookfield’s proposed renewable investment would be fully funded by Origin’s cash flow, with Brookfield not presenting as an equity contributor.

Obviously, Origin can do this alone, without any need of being owned by Brookfield. In fact, it would be better placed to do this as it would still own Australian Pacific LNG and receive the large dividends it pays every year. Under Brookfield’s proposed takeover, APLNG would be owned by EIG Partners – which would deny Origin the cash flows it would otherwise require for the transition to renewables investment.

So, despite all of Brookfield’s talk of using Origin to accelerate the energy transition, if you dig, and not even deeply, you find nothing more that just another opportunist private equity fund trying to take suckers for a ride.

But the rest of us have to know we are in the company of the masters of the universe and click our heels whenever we are given the cue from their obedient investment banks.

The truth is, we owe the Canadians nothing. People should remember when Marius Kloppers, then chief executive of BHP Billiton, the world’s largest miner, sought to take over the Potash Corporation of Saskatchewan, the bid was dismissed in confected national interest terms by a dutiful Canadian government.

The Foreign Investment Review Board should consider applying the same national interest consideration to Brookfield’s opportunist proposition as the Canadian government did in 2010 with alacrity to BHP. Origin is, after all, a key national asset.

Australia, the 13th-largest economy in the world, remarkably possesses the third-largest pool of savings in the world. We have capital coming out of our ears. And patient social capital to boot.

We need strings-attached Canadian private equity capital front-running a premium Australian asset like we need a hole in the head.

The markets in Australia should tell Brookfield to find some other bunnies for its get-rich-quick schemes.

 

Former prime minister Paul Keating is an adviser to Lazard Australia, which is providing advice to AustralianSuper, which opposes the Brookfield/EIG offer.

Original article published in the Financial Review on 30 November, 2023.

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