Cannon-Brookes launches shareholder campaign against AGL demerger

Australian billionaire and Atlassian co-founder Mike Cannon-Brookes is remaining headstrong in his battle with AGL’s (ASX: AGL) board, issuing a letter to shareholders outlining reasons why he believes they should vote against the energy giant’s proposed demerger.

The move comes two weeks after Cannon-Brookes bought an 11 per cent stake in AGL via his investment vehicle Grok Ventures, which was initiated in a bid to thwart the group’s plans of splitting into two entities – AGL Australia and Accel Energy.

While the proposed demerger would see AGL remain as an energy retailer, it would also create Accel Energy – a company that would focus on electricity generation and the repurposing of existing generation sites into low-emission industrial energy hubs.

According to Cannon-Brookes’ letter to shareholders, the new business would rely on fossil fuels for 90 per cent of its energy generation. For the proposal to be successful, it requires support from 75 per cent of shareholders. 

“We believe this is a deeply flawed plan that will deliver a terrible outcome for AGL shareholders, workers, customers, Australian taxpayers and the planet,” Cannon-Brookes said.

“We believe the best way we can realise the potential value of the company and create a brighter future is if we vote against the demerger and keep AGL together.”

In his letter, Cannon-Brookes stressed the following reasons against the company’s proposed demerger:

1. The demerger strategy misses one of Australia’s biggest economic opportunities

“The scheme booklet released on 6 May 2022 confirms the board’s lack of leadership and a strategy that misses one of Australia’s biggest economic opportunities, decarbonisation,” Cannon Brookes said to shareholders.

“Instead, shareholders are being asked to carry the burden of approximately $400 million to $500 million in demerger costs and take a back seat to Australia’s energy transition.”

The Grok founder stated the “lack of vision from the board is consistent” with its track record as it has “spent $0 on direct development of renewable generation over the last five years.”

“This inaction doesn’t just miss the economic opportunity, it’s globally irresponsible,” he added.

“AGL Energy is Australia’s single largest greenhouse gas emitter, representing 8 per cent of Australia’s emissions. This is more than the countries of Ireland, Sweden, Portugal, or our neighbours, New Zealand.”

2. Dividends and Accel Energy’s solvency are at risk

According to an independent expert report, shareholders are “likely to face lower dividends if the demerger proceeds.”

Cannon-Brookes claimed that “shareholders are unlikely to receive any franking credits for their Accel Energy shares until June 2025.”

“We are worried about Accel Energy’s cash flow profile based on the future profitability of its coal assets.”

“The independent expert’s report did not validate the board’s claim that coal-fired power stations owned by Accel Energy will continue to be profitable assets through to their current target closure dates, reinforcing our doubts regarding the company’s ongoing solvency.”

3. The demerger is value destructive

The Grok founder also stated he does “not believe that AGL Australia’s valuation will increase once it’s split, as it will still rely on Accel Energy and its coal generation assets over the next five years.”

“It will also have a worryingly high debt burden, compared to similar companies, which may limit growth opportunities,” he added.

He also noted the “independent expert’s report highlights the risk that Accel Energy may be valued at less than it is as part of AGL Energy, due to its heavy coal exposure.”

4. The board is ignoring shareholders, customers and workers

Cannon-Brookes also outlined that the demerger plan was not in with the Paris Climate Accords, which is aiming to keep the planet’s warming below 1.5 degrees.

“This is despite the majority of shareholders supporting a motion calling for Paris-aligned targets at AGL Energy’s most recent Annual General Meeting,” he said.

“This is also despite AGL Energy’s largest industrial customer, Tomago, demanding clean energy by the end of this decade.”

He also noted AGL’s scheme booklet mentions jobs only once in 384 pages.

“It does not provide any detail on the transition plan for its workers, who will be impacted by its coal generator closure timelines,” Cannon-Brookes said.

“Ignoring these three key stakeholder groups risks further value destruction.”

However, the AGL board insists the demerger is a step in the right direction, believing it would create “the potential to maximise growth in the value of shares by giving each company the freedom to pursue individual strategies and growth initiatives.”

If successful, the demerger would see existing AGL shareholders receive one share in AGL Australia for every share in AGL Energy held. In addition, Energy shareholders will also retain their existing shares once the company is renamed Accel Energy.

The move to demerge was proposed on 31 March 2021 and would see Accel establish coal closure dates to no later than 2033 for Bayswater Power Station and 2045 for Loy Yang A Power Station. It would also aim for net-zero emissions by 2047.

It also comes after AGL rejected two takeover bids from a consortium led by Brookfield Asset Management, which the Grok founder was a part of.

The second offer valued the target at approximately $5 billion, but was knocked back by the board, who stated they were making “strong progress on the demerger.”

Shareholders will have the opportunity to vote on the deal on 15 June 2022.