AGL Energy now lacks direction after stunning board rout

AGL Energy ASX board directors Graeme Hunt Peter Botten Diane Smith-Gander Jacqueline Hey demerger Cannon-Brookes
AGL Energy’s planned demerger into AGL Australia and Accel Energy has been canned after its board believed it would not secure sufficient shareholder support.

Australia’s biggest electricity supplier and carbon emitter – AGL Energy (ASX: AGL) – faces a very uncertain future after the withdrawal of its board’s plan to split the company into two.

Current AGL chief executive officer Graeme Hunt and chairman Peter Botten will now depart the company once suitable replacements are found.

Mr Hunt and Mr Botten were driving the demerger before a planned shareholder vote.

Also, leaving the board will be independent directors Diane Smith-Gander and Jacqueline Hey.

After losing four directors, AGL will be left effectively rudderless and treading water.

Will billionaire technology business leader Mike Cannon-Brookes who became AGL’s biggest shareholder with 11.2% of the company be the one who gets a couple of board seats and drives a very different plan to speed up the shutting down of coal-fired power stations to replace them with renewable energy?

Or will the remaining four board members hold a bit of a fire sale, selling off some assets as part of a “plan B” to reduce the company’s exposure to coal and refocus on AGL’s massive and profitable customer base?

Victorious Cannon-Brookes now trying to stop asset sales

It is hard to know but already Mr Cannon-Brookes is making noises about opposing any moves to effectively achieve the demerger through selective asset sales.

Mr Cannon-Brookes might have impressively “won” the battle to stop the demerger by rallying enough major shareholders to reach the 25% “No” vote required to beat the demerger.

However, his direct shareholding is not big enough to control the direction of the entire company or even guarantee two board seats and it is unclear where that direction is going to come from or even how quickly he will be granted a seat at the board table.

Given current market conditions it seems unlikely that Mr Cannon-Brookes and his former partner Brookfield will be returning to the fray with another takeover offer, given that the last one was not successful.

AGL must now find a new direction

All of which left the remnants of the AGL board to come up with some reasonably fast way of patching up the gaping holes in its executive ranks and to cast a vision of a meaningful future for a company that has effectively burned through massive amounts of shareholder wealth by paying very fancy prices for big coal fired generators.

The world has changed very quickly since then, with the large and growing amounts of rooftop and large solar and wind installations in Australia effectively making the coal plants less profitable during the middle of the day as the renewables churn out increasing amounts of power into the grid.

Improving storage technology including batteries is broadening out the baseload appeal of renewables and coal plants no longer rule the roost with the lowest generation costs although it is very clear that the grid will require a progressive and carefully planned transition over decades to avoid price spikes and blackouts.

Even under the greenest of visions for Australia’s national electricity grid, coal and gas fired generators will be required for a very long time.

Russian invasion causing electricity and gas price spikes

All of this comes at an interesting time with coal and gas prices soaring due to the disruption of Russia’s Ukraine invasion.

There has now been a lot of upward price pressure on electricity and gas supplies – particularly in states that burn black coal to produce electricity – although that may not lead to a greater number of suitors for the sort of assets AGL might want to sell.

The way the eventual “green grid’’ transition happens was at the heart of the battle to win the votes of AGL shareholders and in the end the board and management judged that they simply did not have the numbers and effectively put up the white flag by scrapping the shareholder vote and inviting offers for company assets.

Unlike the federal election though, there is no “new government” waiting in the wings to grab the levers and take over – that task will be battled for by a range of parties including Mr Cannon-Brookes and potentially several other players.

Business abhors a vacuum so AGL needs a new direction

Like nature, business abhors a vacuum and the leadership vacuum at AGL will be filled one way or another as it tries to restock its board ranks and proceeds with another strategic review.

Just how quickly and effectively remains to be seen with the board’s latest plan for a strategic review very similar to the review completed 15 months ago that led to the demerger proposal that has just been abandoned.

The end of the demerger also means the company has wasted around $160 million progressing the demerger and will also have ramifications for how it arranges its debt portfolio.

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