It's all about fees and power - Business - Business - smh.com.au

It's all about fees and power - Business - Business - smh.com.au
It's all about fees and power - Business - Business - smh.com.au

ALAN KOHLER
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YOU might think the battle between AGL and Alinta is only about simple things like hubris and megalomania. Well, yes, it is partly about those, but it's mostly about something much more complicated: money, specifically infrastructure fees, which are an especially desirable kind of money.
On one level we have an uncomplicated, but unusual, takeover shoot-out. Each company is proposing a superficially identical merger in the ratio of 75:25, that is, AGL shareholders would end up with 75 per cent of the merged entity and Alinta shareholders would end up with 25 per cent.
And you might think that since they agree on this, it's virtually a done deal. Think again. Each has rejected the other's proposal, even though they are the same. Why? Because on another level the situation is indeed about hubris and megalomania: each team of directors and managers wants control of the business and will not compromise.
Usually when two companies merge they come up with a deal whereby one chap gets the chairmanship and the other chap gets the management, or something like that. Not this time.
Last Friday the chairmen of Alinta and AGL, John Poynton and Mark Johnson, held a meeting to see whether something could be sorted out. It couldn't, so Alinta launched its hostile bid on Monday.
Johnson even proposed a scheme in which Alinta actually bids for AGL, but AGL management end up in charge. That was so AGL's gas pipes could be written up in value by $1 billion and then depreciated over 20 years, knocking $50 million a year off the tax bill (that's something you can only do after purchasing assets, so AGL can't do it but it is an important part of Alinta's proposal). No dice. Poynton and Alinta CEO Bob Browning want to be in charge and that's that, otherwise AGL has to pay a control premium for Alinta.
The next step will have to be a cash bid from AGL.
The people on both sides of this stand-off are entirely persuaded of their own excellence. AGL's board does not believe Browning is capable of running an electricity business and, having recently hired Paul Anthony, would not hire Browning; Alinta's board, and Browning, believe that if they need electricity expertise they can go find it and that they are the best managers of infrastructure in the land, via the "Alinta model". More on this below.
There is an argument that electricity needs special management expertise because it is unique: the retail price is fixed, supply must be continuous, and the cost price is wildly variable. On a hot day when everyone turns on air conditioners and power demand spikes, the retailer is at the mercy of generators and the cost price can go from $50 per megawatt hour to $10,000 in a matter of hours. A misjudgement can wipe out a month's profit in a day.

An electricity company CEO needs good meteorologists on the staff and an intuitive feel for predicting demand spikes. Apparently Paul Anthony is such a person. On the other hand, there were six people on the AGL board's short list for the job, so it's not as if he is the only person in the world who can do the job.
Anyway the whole argument about management is ridiculous, unseemly and a distraction. The real difference between the two sides is fees: that is, AGL's plan for demerging and setting up a separate infrastructure fund, versus the "Alinta Model", which is the same as the Origin Energy model.
Most infrastructure funds pay their external managers a 1.5 per cent base fee plus 20 per cent of any outperformance above an index benchmark, which is rich enough (This is commonly known as the Macquarie model).
Alinta and Origin charge their infrastructure funds those fees, plus a whopping 3 per cent of gross revenue.
Alinta Infrastructure Holdings' revenue last year was $62.9 million, of which 3 per cent is $1.9 million. Alinta's plan, once it gets control of AGL, is to continue with AGL's existing demerger plan (into energy and infrastructure businesses) but then to enfold the latter into the Alinta model. According to AGL's demerger scheme documents, AGL Infrastructure's revenue last year would have been $4.9 billion, of which 3 per cent is $147.4 million. Now that's more like it - serious money.
Alinta's Bob Browning says there would be no fee leakage in his proposal because the shareholders would all be the same: the money would be going from one pocket to another. Well, actually, Alinta-AGL Energy would only own 20 per cent of Alinta-AGL Infrastructure and it is not yet decided who would get the other 80 per cent and, in any case, shareholders come and go - over time they become different - so what he said is not exactly true. There would be more fee leakage out of Alinta/AGL than there is with Macquarie Bank and its funds, which is saying something.
Which brings me to a final and very interesting aspect of the affair. AGL's chairman is Mark Johnson, an executive and director of Macquarie Bank. The AGL board's proposal for Alinta is to create an internally managed infrastructure fund. Johnson, as chairman, is arguing forcefully in favour of this.
The Macquarie model involves external management, with lots of fees, something Alinta's Bob Browning has refined and taken further. Mark Johnson is now in the uncomfortable position of saying this is bad: internal management is cheaper and better.
I wonder what his colleagues at Maquarie think about that.
ak@eurekareport.com.au