Underestimate Mike Cannon-Brookes at your peril

There is a reason AGL Energy (ASX: AGL) is taking the $8 billion bid for the company by Mike Cannon-Brookes and Brookfield very seriously.

Mike Cannon-Brookes might look like he has just stepped off a skateboard with his cap and shaggy beard but he is much more than an “accidental billionaire’’ or “woke capitalist’’ – two descriptions that have been thrown around this week by people who should know better – Peta Credlin in particular.

The co-founder of Atlassian is a seriously competent businessman/investor – just look at his canny accumulation of harbourside mansions in Sydney, all of which would now be seriously in profit.

In Brookfield, the Canadian alternative investment manager, he has a partner that has almost a trillion dollars under management and serious amounts of cash to invest in renewable energy.

Together, they are a formidable team and it will take more than a flippant board rejection to make them go away.

AGL remains rooted in the past

The fundamental truth about AGL is that as a company it remains rooted in the past, which is why its shares have fallen so fast, so quickly.

Its plan to split into two – a green and a dirty AGL – is a way of holding on to that past for longer and is likely to destroy even more shareholder value.

That is why this bid is so exquisitely timed, coming before the split and as AGL grudgingly chops a few years off the life of the coal fuelled electricity generators it spent so much money acquiring.

These generators are all actually worth virtually nothing at the moment – possibly less than nothing if you factor in maintenance – with the big prize within AGL being its large and loyal customer base of 4.5 million households and its power grid connections.

Coal plants have become deeply unprofitable

That is a hard fact for AGL shareholders to grapple with, given that the company splashed out billions of dollars buying plants such as Loy Yang A, Liddell and Bayswater.

Indeed, in total it spent more than the current market capitalisation, which has fallen drastically since 2017 when its shares were trading around the $27 mark.

The reason why those coal plants are worth next to nothing is that they no longer produce the cheapest energy on the grid – another detail Peta Credlin needs to catch up with.

For large chunks of the day, these plants are deeply unprofitable, churning out power that can only be sold at a loss because the sun is shining and the wind is blowing, producing green, plentiful and incredibly cheap power.

The coal plants may flip into profit during the night and at peak times as wholesale power prices rise, but given that most coal plants are designed to run constantly, their overall profitability has been rapidly dropping.

That is a trend that is only going to expand greatly as storage solutions including pumped hydro and batteries are increasingly fitted to the grid, allowing excess power produced during the day to be stored and released during power peaks and at night.

So, the faster AGL can phase out its coal power generators at the same time as it is installing replacement solar and wind projects and energy storage, the more money the company can make.

That is not to trivialise the very real need to maintain grid stability and prepare properly for the closure of large coal generators but it is an inevitable trend that will stop for no-one and the bidders have indicated they could spend up to $20 billion on renewable generation projects.

The trend of coal generation closures is also very helpful in bringing about Australia’s plan to reach plan for net zero by 2050, which is why it is puzzling that the Federal Government has not welcomed plans for earlier closures for coal plants.

Making the grid smarter is a great opportunity

Another aspect that might have been forgotten is that Mike Cannon-Brookes is a software expert so he has long seen the transition towards technology through that lens.

With the mass adoption of electric cars also inevitable, together with ever greater use of rooftop solar and batteries in houses around Australia, the ability to develop a smarter grid through software is very real.

Managing that myriad of devices in a smart way could bring electricity costs down even further and faster and if a Brookfield/Cannon-Brookes owned AGL was active in setting that up, it could be a very lucrative move.

That is particularly the case because Brookfield already owns power assets which it can bring to the party – if the ACCC approves, which is far from certain.

Utility companies are traditionally great investments

Traditionally, utility companies have been regarded as very secure investments and that is particularly the case when they own the customers, the generation, transmission and distribution.

That could be the case once more if the current offer for AGL is successful.

The current board are describing the bid as far too cheap but it is still pitched at a premium to what the market valued the company at.

That premium may need to be sweetened to get the deal across the line so it will be interesting to see what develops from here.

One thing the AGL would be wise to do is to continue to treat Mike Cannon-Brookes and Brookfield as very serious contenders and it would not be a total shock to see another potential buyer arrive now that the company is in play.