The world economy is undergoing a phase of dramatic changes: an increasing cultural sensibility to climate changes is triggering significant economic changes and placing the energy market in centre stage. The acquisition of Origin Energy by Brookfield and EIG Partners has been incentivized by a mix of policies to create a more efficient allocation of resources in the energy market. In the first part, we highlight the main aspects of Australia’s energy transition. In this article, we analyse the deal. Following a brief overview, we describe Brookfield’s acquisition of Origin’s Energy Markets and in an additional part, we address EIG Partners’ acquisition of Origin’s Integrated Gas business.
Australia’s Energy Transition
Australia is undergoing a globally significant transition to renewable energy. Australia's energy mix has changed dramatically in recent years due to the rapid expansion of large-scale renewable installations, such as solar and wind farms, as well as the market for rooftop solar. Compared to just five years earlier, when renewables peaked at about 30%, in 2022, renewable energy powered two-thirds of the nation's electricity grid for a couple brief moments.
Beyond making a firm commitment to reduce greenhouse gas emissions by 43% from 2005 levels by 2030 and net-zero by 2050, the Australian Government is planning to become a major global supplier of renewable energy. To this end, Australia is ramping up solar, onshore and offshore wind capacity, and producing significant amounts of green hydrogen for export. Energy efficiency and performance, as well as new funding streams and investment in underpinning infrastructure, play a key role.
On 12 August 2022, the Energy and Climate Change Ministerial Council decided to create a new National Energy Transformation Partnership. Through the partnership, governments will collaborate on key actions to support the energy transformation.
In particular, the Australian Government funded A$24.9 billion through its Powering Australia plan over this decade (2020-2030) with the goals of reducing pressure on energy bills, enhancing energy reliability, lowering emissions, and delivering a high energy performance economy. The objectives for achieving these goals are the decarbonization of current industries and transportation networks, in addition to changing Australia's electrical supply to run mostly on renewable energy sources.
Australia has one of the world’s most abundant solar and wind energy potential, a government committed to net zero backed by supportive policies and funding, and a world- leading innovation ecosystem including world-regarded research expertise and dedicated funding and industry bodies such as the Australian Renewable Energy Agency (ARENA) and the Clean Energy Finance Corporation – all of which contribute to the establishment of a decarbonized economy. Currently, Australia ranks 6th globally for the attractiveness of its renewable energy investment and deployment opportunities according to EY’s Renewable Energy Country Attractiveness Index 2022. And from the International Energy Agency, is ranked 1st globally for installed photovoltaic solar capacity per capita.
Accenture's "Sunshot in 2023: Advancing Toward Australia's Renewable Exports Opportunity" comments on the future of the Australian renewable energy sector. In 2021, Accenture argued that thanks to six renewable export opportunities (critical minerals, green metals, batteries, renewable hydrogen and ammonia, education exports, and green professional services), Australia’s low-emissions future could sustain more than 400,000 secure jobs and contribute over A$100 billion to the Australian economy. The report recommends that Australia target four primary areas of growth: export-oriented industries, a renewable buildout to support the Australian economy as it switches from carbon-intensive energy sources to renewable energy, widespread electrification, and an Energy Transition Authority. Moreover, with Japan, the U.S., and Germany all developing renewable industries and export strategies, Australia needs a National Renewable Exports Strategy that fosters domestic renewable industry development and opens doors for export.
Obviously, in this broader set of policies and macro trends, a few major companies play a leading role. The data discussed below is sourced from the “State of the Energy Market 2022” report by the Australian Energy Regulator (AER), which highlights the role of Origin Energy in Australian energy markets.
Private entities control most electricity generation in NSW, Victoria, and South Australia in NSW, Origin Energy and AGL Energy owned more than 40% of the region's capacity and produced almost 60% of the state's output in 2021. With extensive capacity across the mainland, Origin Energy ranks as the second-largest supplier of flexible generation (electricity generation that can adapt fast to changing market conditions). Together, Origin Energy and Snowy Hydro control nearly all flexible capacity in NSW and more than three-quarters in Victoria. 3 retailers – AGL Energy, Origin Energy and EnergyAustralia – supplied 44% of electricity generation in 2021–2022 and supplied 64% of residential energy customers in Q1 2022.
Source: Australian Energy Regulator (AER)
In the gas market, Origin Energy owns 37.5% of the Australia Pacific LNG (APLNG) project, with a capacity to produce 9 million tons per annum. APLNG is one of Queensland’s LNG industry's three major projects that source gas mainly from the Surat–Bowen Basin.
Source: EnergyQuest
In the retail energy market, Origin Energy, AGL Energy and EnergyAustralia are Australia’s largest energy providers (The “Big 3”). They have a significant share in the residential electricity and gas markets of NSW and South Australia and a lesser but still substantial portion of the Queensland and Victorian markets. Despite a decline in market share in recent years, at the start of 2022 the Big 3 still served more than 60% of residential and small business customers, while Tier 2 retailers were serving about 20% of them. Origin Energy and Snowy Hydro’s share of the retail market is greater than their generation market share, but they have significant flexible generation, which helps them manage the risk of high wholesale prices.
Source: Australian Energy Regulator (AER)
As with electricity, AGL Energy, Origin Energy and EnergyAustralia are the dominant retailers in the gas market, serving more than 1.9 million (82% of a total of 2.4 million) small customers.
Deal Overview
A consortium comprised of Brookfield Renewable Partners and its institutional partners GIC and Temasek and MidOcean Energy, an LNG company formed and managed by the institutional investor EIG, acquire 100% of the shares of Origin Energy Limited. The consortium values Origin Energy at an enterprise value of A$18.7 billion. It will therefore pay A$8.91 per share (A$5.78 per share + $2.19 per share with an assumed fixed exchange rate AUD/USD of 0.70), representing a premium of 53.4% per share compared to the unaffected share price of the company. The unaffected share price is the closing price of November 9th, 2022, the last trading day before the consortium's proposal. Considering the VWAP, the premium is 59% or 54.7% for one month or three months VWAP, respectively. The price represents the consortium's third offer. On August 8th, 2022, the consortium offered to buy the company for A$7.95 per share; on September 18th, 2022, the consortium submitted a price of $8.70 – $8.90 per share.
Source: Financial Review, Bloomberg
Brookfield and its institutional partners will own Origin's Energy Markets business, Australia's largest power generator and energy retailer. The Energy business compromises retail energy, renewable energy assets, and gas power stations. MidOcean will own Origin's integrated Gas business, including its upstream gas interests and 27.5% in Australia Pacific LNG (APLNG). MidOcean will sell 2.49% interest in APLNG to ConocoPhillips, which already owns 47.5% of APLNG and intends to take over the company's upstream business. Brookfield also included Reliance Industries as a strategic partner to help identify possible collaborations in renewable energy in the context of the transaction.
Brookfield is pursuing the acquisition through its Brookfield Global Transition Fund I, representing the most extensive private fund focusing on the transition to net zero. EIG, one of the largest specialized investors in energy and infrastructure, will pursue the acquisition of Origin's Integrated Gas business through MidOcean Energy to create a diversified and global LNG portfolio of high-quality projects with solid cash flows.
Financial advisers of Origin are Jarden and Barrenjoey Capital Partners. UBS, JPMorgan, Citi and MUFG advised the bidders. The transaction is expected to close in early 2024. The deal needs to get approved by the Australian Competition and Consumer Commission (ACCC) and Foreign Investment Review Board. The ACCC could flag a relatively small exposure to vertical integration from the acquisition in Victoria's Mortlake, where Brookfield owns transmission via AusNet and Origin has generation.
Brookfield is pursuing the acquisition through its Brookfield Global Transition Fund I, representing the most extensive private fund focusing on the transition to net zero. EIG, one of the largest specialized investors in energy and infrastructure, will pursue the acquisition of Origin's Integrated Gas business through MidOcean Energy to create a diversified and global LNG portfolio of high-quality projects with solid cash flows.
Financial advisers of Origin are Jarden and Barrenjoey Capital Partners. UBS, JPMorgan, Citi and MUFG advised the bidders. The transaction is expected to close in early 2024. The deal needs to get approved by the Australian Competition and Consumer Commission (ACCC) and Foreign Investment Review Board. The ACCC could flag a relatively small exposure to vertical integration from the acquisition in Victoria's Mortlake, where Brookfield owns transmission via AusNet and Origin has generation.
Brookfield acquiring Origin’s Energy Markets: the “First Component” of the Deal
Brookfield Renewable is the flagship listed renewable power company of Brookfield Asset Management, a leading global alternative asset manager with roughly $800 billion of assets under management. Brookfield Renewable operates one of the largest publicly traded platforms for decarbonization technologies. Their portfolio comprises hydroelectric, wind, solar, distributed energy, and sustainable technology solutions. It has approximately 25,400 megawatts of installed capacity and a development pipeline with about 110,000 megawatts of renewable power capacity, 8 million metric tons per annum of carbon capture and storage, 2 million tons per annum of recycled materials capacity and 3 million metric million British thermal units of annual capacity of renewable natural gas projects.
The Brookfield Global Transition Fund I focuses on investments accelerating the global transition to a net-zero carbon economy. With an amount of $15 billion raised by institutional investors, it represents the largest fund ever to support the growth to net zero. Typical targets of the fund represent opportunities for reducing greenhouse gas emissions and energy consumption, increasing low-carbon energy capacity and supporting sustainable solutions. Brookfield Renewables expects to invest roughly $750 million, funded through a mix of corporate debt, up financing of existing hydro assets and proceeds from asset recycling.
GIC is a long-term global investor established in 1981 to manage Singapore's foreign reserves. GIC is committed to long-term value investing with a specific focus on technology and sustainability. Temasek was incorporated in 1974 and is another institution of Singapore's government for investments to support companies with reasonable future growth expectations to foster the state's economic development. Temasek is an owner-investor. They make investment decisions based on long-term structural trends such as digitalization, sustainable living, future of consumption and longer lifespans.
The acquisition of Origin Energy gives Brookfield access to a range of assets that align with its investment strategy. Origin Energy has a significant renewable energy portfolio, including wind and solar assets, and is well-positioned to capitalize on Australia's favorable renewable energy policies. Additionally, the company has expertise in energy storage and management, which is becoming increasingly important as the grid shifts towards intermittent renewable sources.
Brookfield can leverage its operational capabilities and financial resources to scale Origin Energy's renewable energy portfolio, accelerate the retirement of coal generation, and transition to an energy mix that is more aligned with the Paris Agreement. Furthermore, Origin Energy's expertise in sustainable solutions, such as waste management and resource efficiency, aligns with Brookfield's investment strategy to drive the growth of a circular economy. This is a critical component of achieving a net-zero economy as it reduces waste and promotes sustainable resource use. We do believe that there are two main reasons justifying the premium paid:
- Favorable policy ground for the energy transition
- Synergies between Brookfield global transition fund and Origin Energy
The Climate Change Act, passed by the Australian government in September 2020, stipulates that the nation will achieve net zero emissions by 2050. The Act contains several emission- reduction initiatives, such as the creation of a carbon market, the implementation of vehicle fuel economy standards, and the advancement of renewable energy sources. Plus, the government has set a 2030 goal of obtaining 50% of Australia's electricity from renewable sources. The Australian government has also implemented a number of incentives to promote the use of renewable energy in addition to these initiatives. For instance, the government has set up a Renewable Energy Target, which mandates that a specific proportion of power be produced from renewable sources, and it provides financial incentives for homes and businesses that install solar panels or other types of renewable energy. Finally, the foundation of a new agency and the creation of a $1 billion grid investment fund are only two of the steps the government has started to encourage the development of renewable energy infrastructure.
Moreover, Brookfield has promised an additional $20 billion by 2030 to finance Origin Energy's clean energy transition plan by constructing renewable energy infrastructure and storage. By constructing the necessary renewable storage facilities, Brookfield hopes to establish Origin as the premier "greentailer." Origin Energy's strategic fit with Brookfield's investment goals is evident in the recent comments by Mark Carney, the chair of Brookfield Asset Management and head of transition investing. Strong synergies for Origin Energy's clean energy sector are anticipated given the company's management team, market presence, capital investment from Brookfield, and competence in developing renewable energy sources, as Carney mentioned.
EIG Partners acquiring Origin’s Integrated Gas business: the “Second Component” of the Deal
The acquisition of Origin Energy, as aforementioned, has been structured in a unique manner. After the deal is closed, the company will be separated into two distinct entities with Brookfield, co-investing with institutional investors GIC and Temasek, acquiring Origin’s Energy Market Business, and EIG Partners, a private equity fund, which is going to purchase Origin’s Integrated Gas business through MidOcean Energy.
EIG Global Energy Partners, a global institutional investor in the energy industry that was founded in 1982, is specialized in private energy and energy-related infrastructure investments. Based in Washington D.C., EIG has $22.7 billion assets under management as of December 2022, and has invested over $44.6 billion in the energy sector through more than 396 projects or businesses in 42 nations across six continents.
EIG has the capability to invest at any place in the capital structure of an energy project or company, from common equity to senior debt, with the fund typically investing in hybrid debt or structured equity securities. As part of the EIG strategy, the fund typically seeks to commit a minimum of $100 million to a project or company and has the capacity to commit $1 billion or more to a single transaction.
EIG has three primary ways of investing: the first are energy funds, which pursue privately negotiated, directly negotiated deals with mid- and large-cap energy firms and projects. Such funds usually look for deals that are supported by tangible assets including power plants, pipelines, processing facilities, liquefied natural gas terminals, and proven oil and gas reserves. Other than that, EIG actively invests through credit/direct lending, and Harbour Energy Ltd.
However, for the transaction in question, EIG would invest in Origin through MidOcean Energy. EIG founded and manages MidOcean, an LNG (Liquified Natural Gas) company, with the goal of creating a varied, hardy, affordable, and carbon-competitive LNG portfolio. It underlines the growing significance of LNG as a geopolitically significant energy resource and EIG's trust in LNG as a key enabler for the energy transition. In fact, the acquisition of Origin by EIG is part of its most recent effort to increase its market share in the global Australian LNG export market, a market it first attempted to join in 2018 with a failed $14.4 billion deal for Santos. It attempted to enter the $25 billion APLNG project, one of three LNG export projects in Queensland, by agreeing to purchase a 10% stake from Origin in October 2022, but ConocoPhillips, Origin's current partner, intervened to block its entry. Only last month did EIG's MidOcean reach a separate agreement to purchase Tokyo Gas' minority shares in four Australian LNG projects for $2.15 billion, but the new attempt to acquire Origin would be a significant advancement.
When the deal is concluded, MidOcean will separately own Origin’s Integrated Gas segment, which includes its upstream gas interest and the 27.5% stake in Australia Pacific LNG (APLNG). As part of the transaction, MidOcean has reached an agreement with ConocoPhillips to sell a 2.49% stake in APLNG. ConocoPhillips, which currently owns 47.5% of APLNG, is the present downstream operator and plans to take over APLNG's upstream operations. MidOcean Energy has secured almost $3 billion in debt from seven banks to support its acquisition of Origin Energy. The bridge financing is being provided by UBS, Westpac, SMBC, Standard Chartered, RBC Capital Markets, Deutsche Bank and Societé Générale. Moreover, MidOcean was advised on the deal by J.P. Morgan and UBS.
Blair Thomas, chairman of EIG Partners, said: “People need to recognize that this is a transition, and that gas is the key fuel to make it happen. So, it’s in everybody’s interest that we provide security and price stability – otherwise, there’s a real risk that the public turns on decarbonization, and then we’re all losers.” The two pillars behind EIG’s bid to take over Origin Energy are the following:
- Building an attractive portfolio of world class assets and enabling the energy transition
- Leveraging operating expertise and long-term contracts with advantaged positions to key customers
The development of top-notch gas deposits and infrastructure for downstream processing have drawn almost $30 billion in capital investment to APLNG, a premier, well-funded integrated LNG project. It can serve important clients in the Asia-Pacific region and beyond because of its advantageous position. The acquisition of APLNG completes the portfolio of Australian LNG assets that MidOcean already owns after purchasing them from Tokyo Gas. This acquisition supports MidOcean's belief that gas and LNG are crucial fuels for the transition between the present and the coming energy systems. LNG is essential to meeting the goals of the global energy transition, particularly in assisting the top carbon emitters in converting from coal to gas and lowering their emissions. A crucial component of the roadmap, broader electrification of economies is made possible by natural gas, which supports greater penetration of renewable energy sources in power networks and improved grid resilience.
The management team and board of MidOcean bring extensive Australian and international LNG operational experience to the table thanks to CEO De la Rey Venter's 25 years of industry experience and EIG's 20+ years of global LNG sector expertise. The company's dedication to the secure and long-lasting operation of its project interests is evidenced by its long-term investment perspective. The main source of revenue for APLNG is the sale of LNG under long-term take-or-pay contracts to investment-grade counterparties in Asia. The project is well-positioned to fulfill the rising LNG demand in the Asia-Pacific region and operates at breakeven costs that are competitive globally. As a result, it enjoys a favorable position with important clients and offers them high-quality, long-term contracts.
Conclusion
The joint acquisition of Origin by EIG Partners and Brookfield represents a huge deal, both in figures and economical terms. In fact, it is one of the latest largest transactions in history for Australia and, in a more global context, will be an impactful event for the energy industry in Australia and in the South Pacific region, where Origin operates too.
We believe that, thanks to this partnership, Origin will continue to grow steadily as it has done over the last years and consolidate its role as a key player in both the energy and gas sector, possibly boosted by the synergies, knowledge and network that EIG’s controlled companies will contribute to the firm’s operating environment.
By Lukas Brendel, Francesco Doga, Giorgio Gusella, Matteo Panizza
SOURCES
- Accenture’s “Sunshot in 2023: Accelerating Towards Australia’s Renewable Exports Opportunity”
- Australian Department of Climate Change, Energy, the Environment and Water
- Australian Energy Regulator (AER)
- Australian Financial Review
- Australian Trade and Investment Commission
- Brookfield Asset Management 2021 ESG Report
- Brookfield Press Releases
- Financial Times
- Financier Worldwide
- International Energy Agency: "Net Zero by 2050 – A Roadmap for the Global Energy Sector"
- The University of Sydney on "The Politics of an Unsettled Energy Transition"
- World Wildlife Fund (WWF) Australia