First heard in mid-June but getting louder last week, the noise seems to be coming from the boardrooms of Alinta and AGL, two Australian utilities that want to merge – sort of.
So far, nobody involved is hollering “game off”, but there must be few nervous advisers who wonder whether their carefully crafted scheme can tolerate another setback.
There are also likely to be some extremely nervous investors in both companies who are starting to worry about whether it’s time to either jump ship or drop a note to the management of Alinta and AGL asking, politely of course, whether all is well.
From where The Slug sits it doesn’t look very well, and never did.
Your scribe’s misgivings only grew when Australia’s anti-monopoly watchdog, the ACCC, stepped in and put limits on the proposed merger. Now last week’s shock $1 billion cost blow-out in the Papua New Guinea gas pipeline project has raised doubts about whether the project will even proceed.
Before the latest developments, take a step back in time. The original Alinta v AGL stoush was a messy affair, with both companies making takeover bids for the other – classic “Gunfight at the OK Corral” stuff.
Then came a solution, Alinta was to take some of AGL’s assets, such as pipelines, and AGL was to separate its energy and infrastructure assets – and steadily buy Alinta’s retail assets.
The Slug remembers looking at the terms of that deal and thinking it was a dog’s breakfast.
It now seems likely that The Slug is not alone with the ACCC suggesting on June 16 that Alinta not get its hands on a controlling stake in the Australian Pipeline Trust – a potential game breaker that no one yet seems to have resolved.
But just to throw a fresh can of kero onto the fire, AGL has admitted that the PNG pipeline ain’t looking too flash, thanks to a $1 billion cost blow-out, not to mention the failure to sign up new customers.
As far as The Slug can see, the only firm customer for PNG gas is AGL itself. Everyone else approached has been holding back to see the detail in the pricing – and a big capital cost blow-out has not done anything for the cost of gas to be delivered.
The spin from AGL is that the increase in the pipeline cost from between $2.5 billion and $3 billion to between $3.5 billion and $4 billion is the fault of soaring steel, labour and general construction costs – very much a “not our fault” plea.
If The Slug was a shareholder in AGL, he would be asking several questions such as (a) if not your fault then why didn’t you see it coming six months ago when every other big ticket project in the world was suffering similar cost blow-outs? (b) what does the cost blow-out do to the competitive position of the gas you propose to buy, and on-sell? And (c) who’s actually buying PNG gas apart from you?
The stock market, so far, doesn’t seem to have cottoned on to the fact that the Alinta/AGL merger/marriage/carve-up (call it what you like) is in serious trouble.
Handling the ACCC is one issue that the lawyers can probably sort out. Explaining a cost blow-out can also be handled. But what cannot be tolerated is the extreme uncertainty as to what the price of PNG gas will be, and who (apart from AGL) will actually buy the stuff.
If The Slug was an AGL shareholder looking at a deal which seems to leave him with a big stake in a project that appears to hit roadblock after roadblock, he would be waving the T-sign from the sidelines and calling for time-out until those questions are answered.
