Readers may remember, and if not, use the archive function on this site (isn’t the internet marvellous!), that last week The Slug noted the remarkable way in which the share price of AGL and Alinta had risen, up to the point of a merger being proposed.
The spectacular gains over the past six months posed the question of why humble utilities would be attracting so much investor attention.
Today, it’s a different picture. The last time The Slug looked, both AGL and Alinta were falling, creating a sort of Dutch auction situation where the bidders keep suggesting a lower price before the deal is done.
In the case of Alinta, part of the price fall can be attributed to the stock going ex-dividend, meaning it has passed the point at which a shareholder is entitled to received cash from the company, in this case 23c a share.
In the case of AGL the price fall is a lot harder to explain, except that it too could be hooked into Alinta’s share price movements because the merger being proposed is on a share-swap basis.
Whatever the explanation, there is something wrong in the way the market is behaving, and the seeds of a mess appear to have been sown for both companies.
The immediate issue for Alinta is obvious. It has paid cash for its 20% stake in AGL, give or take a few shares. The cost was around $19.45 a share, a price so rich that institutional investors fell over themselves to dump stock.
When The Slug looked last week, the AGL price was $19.10, leaving Alinta 35c out of the money. When a fresh look was taken at the start of this week AGL was down to $18.82, leaving Alinta 63c out of the money on each share – or around $57 million on its original outlay, assuming it paid $19.45 for each share acquired in the raid.
In the case of Alinta, the price when The Slug look last week was around $11. Today it’s around $10.62 – and looking as if it could go lower.
It’s either a brave, or foolish, man to say that these share price falls spell trouble, and since The Slug is often accused of being the latter, he is prepared to say that he can see trouble ahead.
For AGL, there is the looming potential for its demerger plans to be scuttled by Alinta voting down the proposal to split into two companies.
For Alinta, such a move means just as much trouble because it will be locked into a 20% stake in AGL – and be sitting there as the investor who paid the highest price and, therefore, is getting the lowest return.
Just how low that return might be is shown in a calculation of the dividend yield from investing in AGL today, around 3.3%.
The English translation of that yield figure is that it is at least half the interest rate Alinta will be paying Macquarie Bank for the funds to raid AGL in the first place, and perhaps as low as one-third of the interest rate.
Over time, this means that Alinta will be slowing bleeding cash to its banks – a situation that will not be allowed to happen.
All this is pointing to a showdown, a gloves-off brawl in which the small company (Alinta) must break through, or risk losing heavily, while the bigger company risks a lost opportunity to split into an efficient corporate structure.
Logic says a deal will be done because everyone is sitting in a loser’s seat. But that observation returns The Slug to last week’s remark that this is not about playing games in the energy business. This is all about ego – and that can be an expensive trait in any business.
