For non-Australian readers a quick explanation is obviously required.
The Prisoner of Adelaide is Santos, Australia’s third largest petroleum producer.
The Sick Man of Sydney is AGL Energy, one of Australia’s oldest (and proudest) companies which has stumbled into a crisis entirely of its own making.
Together they would make a handsome couple – and perhaps they will sooner than most people think because there is a clock (or is that a time bomb?) ticking under both companies.
It wasn’t that long ago when analysts were speculating that AGL could team up with a foreign player to take over Santos and divide the spoils. But the tables have now turned.
Santos, after two decades of struggle, has possibly won the right to be liberated from an artificial shareholder cap introduced and enforced by the South Australian Government, which wanted to keep Santos under its thumb.
AGL, once purely a Sydney business, has expanded across Australia with a vast array of gas and electricity distribution, plus direct investment in assorted gas production businesses, especially coal seam methane.
It’s that last business, coal seam methane, which last year saw Santos and AGL indulge in a bit of arm wrestling for control of another business, Queensland Gas Company. Until hostilities broke out Santos and AGL had a happy relationship as gas supplier and gas customer.
But times change.
Santos is on a promise from the SA Government that it will be freed of its “takeover protection” shareholder limit sometime next year, assuming the SA Parliament agrees to the Government’s proposed deal – and a one-year parole period is served.
AGL, once a business that bore an uncanny resemblance to a government department, has been turned inside out by a spectacular management versus board of directors confrontation.
Late last week that confrontation came to a head when the high-profile chief executive of AGL, Paul Anthony, was forced out of his office by the board.
Anthony’s problem appears to have been that he tried to do too much too quickly. Not only was he busy slashing the workforce at AGL, but he was at the same time trying to expand the company through aggressive acquisitions and complex deal-making, such as an asset-swap with another power utility, Alinta.
In the end, it was all too much, culminating in an embarrassing profit warning within days of predicting everything was on track. Rather than hit a $400 million annual profit target the new number suddenly became $330 million – and no one seemed to quite know why.
Whatever happened inside AGL, and Slugcatcher reckons it’s a simple case of trying to grow too quickly without the backroom staff to keep the existing business on an even keel, the issue now is “what next?”
Over the past year AGL has been a spectacular loser on the stock market, plunging from a high of $18.23 to recent trades at $13.05 – and perhaps heading lower.
Meanwhile, over at Santos, life could hardly be better. Not only is the share price up from $8.85 to $15.90, thanks to rising world oil and gas prices, but the company has a vision to become a major producer of liquefied natural gas, and is looking forward to its new freedom to do deals – either in cash, or by issuing shares.
Slugcatcher might be getting a little ahead of himself but with AGL in such a mess, and with Santos rampant, it’s possible to imagine the SA Government lifting the shareholder cap earlier than next year, especially if Santos can demonstrate how a cash and share takeover bid for AGL would see it bring business to Adelaide rather than risk losing it.
An enlarged Santos (with AGL under its control) would have a complete petroleum and utility structure, and be just as easily run from Adelaide as from Sydney.
A marriage made in heaven, perhaps.
A perfect time to find out, you bet.
