tentacular pricing makes a sucker of Brookfield

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As smart molluscs, octopuses have a habit of overturning expectations. Shareholders at Australia’s Origin Energy have blocked a near-$13bn bid by a consortium led by the Canadian asset manager Brookfield. One complaint is that the deal undervalued Origin’s 20 per cent share in Octopus, the fast-growing UK energy company.

The takeover saga reveals a staggering lack of consensus on what, exactly, Origin Energy might be worth.

The company’s board and 69 per cent of votes cast on Monday declared Brookfield’s bid was fair. AustralianSuper, the country’s largest pension fund and owner of 17 per cent of Origin, thought it undervalued the company. That swayed enough other voters to deny the deal the 75 per cent uphold required.

The energy transition makes businesses such as Origin hard to value. That is particularly true of the shareholding in Octopus. The UK group includes a retail division, an IT platform and a nascent business selling EVs and heat pumps to consumers. Analysts expect Octopus to be profitable in 2023. It commands tech-style multiples.

Independent experts value Origin at £5.7bn-£6.2bn, or 20 times next year’s ebitda as estimated by Macquarie. AustralianSuper apparently believes it is worth much more. Divergent views of Octopus’s potential are enough to swing opinions because Brookfield’s bid was no knockout.

To see how numbers stack up, put Origin’s electricity generation and energy retail business on 6.5 times next year’s ebitda. That equates to just over AUS$10bn of enterprise value. A stake in a big Australian LNG plant might be worth another AUS$7bn.

Add AUS$2.2bn for the Octopus stake and assume other assets and capitalised costs roughly cancel each other out. Lop off AUS$3.5bn of debt. That yields an equity value for the transaction of AUS$15.7bn, broadly in line with what Brookfield was offering. 

Of course, companies rarely trade at their underlying value – until they come up with a clever strategy to sweat their assets. One consequence of Brookfield’s interest is that Origin must think hard about how energy will affect it as an independent.