ACCC rejects Macquarie Generation’s sale to AGL Energy

April 2014 | DEALFRONT | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

The Australian Competition and Consumer Commission (ACCC) announced in March that it had blocked attempts by the government of New South Wales (NSW) to sell energy supplier Macquarie Generation to AGL Energy Ltd in a deal worth $1.34bn.

AGL, Australia’s second biggest electricity retailer, had agreed to acquire Macquarie Generation in February 2014. The company had announced its intention to fund the deal via a renounceable rights issue to Macquarie Generation’s existing shareholders. AGL had hoped to achieve a closure of the deal in mid-April, provided the ACCC approved the deal.

While both AGL and the NSW government were hopeful that the transaction would be approved, the ACCC’s decision to reject the proposed deal was still widely expected. The regulatory authority was unwilling to assent to the sale as it was concerned that the deal would ultimately reduce competition in the NSW energy sector. “The proposed acquisition would result in the largest source of generation capacity in NSW being owned by one of the three largest retailers in NSW,” said ACCC chairman Rod Sims. “Indeed, with this acquisition, the three largest retailers in NSW would own a combined share of 70 to 80 percent of electricity generation capacity or output. This is likely to raise barriers to entry and expansion for other electricity retailers in NSW and therefore reduce competition compared to the situation if the proposed acquisition does not proceed”.

The verdict handed down by the ACCC represents a significant blow to the hopes of AGL. The company was relying on the acquisition of Macquarie Generation to help it compete with a number of rival firms in the area, including Sydney based Origin Energy Ltd and Hong Kong based CLP Holdings Ltd’s Energy Australia. As a result of the rejection, both the government and AGL have noted that they will review the board’s decision, which could ultimately see a legal challenge being lodged in the Federal Court by AGL.

The NSW government also had high hopes for the deal. They had intended to use the proceeds generated from the sale of Macquarie Generation to fund and develop much needed infrastructure projects in the state. Proceeds from the AGL deal would be used to finance road, school and hospital projects across the state. The sale of Macquarie Generation would have delivered around A$700m to the state’s infrastructure fund, Restart NSW.

In order to help fund the infrastructure scheme the government of NSW has already sold off a number of its energy assets, most notably Delta Electricity, which owns the Mt Piper and Wallerawang power stations, which was sold to EnergyAustralia for A$160m in July 2013, and Eraring Energy, which owned the Eraring and Shoalhaven power stations, sold to Origin Energy for A$50m in the same month. Although the ACCC rejected the Macquarie Generation deal, the sale processes for the remaining state owned energy assets in NSW, namely Green State Power and Delta Electricity’s Central Coast power stations Vales Point and Colongra, are ongoing with both sales expected to be completed in 2014.

Although the deal for Macquarie Generation has been officially called off by the ACCC, and with the NSW government in desperate need of cash, the government has announced that it has no intention of carrying out a fire sale of its assets. “It is very clear we are not going to undertake transactions where we sell assets for less than they are worth and that should give some confidence to the people of NSW,” said NSW’s Treasurer Mike Baird. “We are doing everything possible to release capital to get on with infrastructure but we are not going to do it at any cost. We are not going to do it where assets are sold for less than they are worth.”

In addition to the rejection of the AGL deal, the ACCC has expressed its belief that Macquarie Generation should be sold to a rival bidder, ERM Power Ltd. Mr Sims noted that the competition concerns which hampered the AGL bid would not be applicable to a deal with ERM. “We certainly don’t have any concerns with ERM. ERM is a commercial owner, and so that would satisfy the government’s privatisation objectives.”

Richard Summerfield