Obvious, say some readers, it’s because they’re in the energy business.
Wrong, says The Slug, it’s because they’re in the ego business.
Worse, it’s because they’re in the ego business, mixed with a stiff dose of financial engineering, that has absolutely nothing to do with gas, electricity, or any other form of energy.
From where The Slug sits, they might as well be in the baked bean business run by a management team which has just discovered how to re-engineer finance and tax obligations, to maximise the short-term return to speculators, and pay fat fees to investment banks.
The truth about AGL and Alinta is that over the past year absolutely nothing has changed. They are still utilities. They do not yet explore for oil and gas, and do not enjoy the windfall profits that come with high petroleum prices.
Some of their businesses remain under government regulation, which effectively means price caps, some are deregulated, which means competitive pressure on profit margins.
But, whatever way you cut the AGL and Alinta cakes the answer is the same. These are not high-risk, high-reward businesses and, apart from the way in which the financial engineers are re-modelling the revenue streams to minimise tax and maximise leverage using large amounts of debt, they are utilities that distribute energy for a fee.
It is only when you cut through the public relations hype, and discount the sales spiel of the investment bankers, that you get back to the unavoidable conclusion that much of what we have seen over the past few weeks with AGL and Alinta involves extensive use of strings and mirrors.
That does not mean that a new structure will not emerge from the forced negotiations now underway because Alinta has splashed out the best part of $2 billion to buy a seat at the AGL table.
It could well be that the investment bankers calling the shots at AGL and Alinta convince both boards that the deal they have in mind, the creation of a dominant Australian utility, is a winner.
But a winner for whom?
As far as The Slug can see, the big picture behind the Alinta raid is to merge the two businesses, and then to them split them into a utility operator (selling gas and electricity) and an infrastructure business (which owns the power and pipe lines).
Infrastructure will be loaded to the hilt with tax-deductible debt, the utility will pay it fees to transport energy, and the bankers will peel off fee, after fee, after fee.
In the short-term, this is marvellous for the fee-earners, and the bankers.
In the long-term there is a massive problem, one that will come home to roost when interest rates rise, as they always do, or when capital is needed to upgrade the infrastructure assets.
Some smart investors are starting to see through the mist of PR hype. That’s why AGL is today trading around $19.10, a rather interesting 35c below what Alinta paid for its 20% stake in AGL, and Alinta itself is starting to weaken on the market.
The issue which seems to have caused the most concern is a comment from Alinta that it might make a full cash bid for AGL. If that happens the laws says Alinta must offer at least $19.45 for each AGL share, a price which values AGL at $9 billion, and a price which will only be satisfied with Alinta taking on board a mountain of debt.
Debt, as ever, is the weakness in what’s happening today. The funny thing is that while the business of the utilities has not changed, neither has the fact that debt is always the killer ingredient that turns a boom into a bust.
This debt load, and the fact that AGL is trading below Alinta’s entry price is a warning that the downside risk far outweighs whatever slim upside remains – an upside which will completely disappear once investors wrap their minds around the fact that this is really just a game of ego and fee-frenzy.
