What next in Alinta’s AGL play?

THE past week has been one of headlines and highlights for Alinta, with the Western Australian gas utility announcing a record net annual profit of $239.8 million and flagging its intention to pursue a merger with its larger rival, Australian Gas and Light. Alinta holds the view that there would be more value for AGL shareholders through a merger of the two gas players, followed by a subsequent separation of the combined entity’s assets, than that proposed under AGL’s own demerger plan. From an operating perspective the merger would involve internal restructuring, resulting in the separation of the combined infrastructure assets, including pipelines and power plants, from the energy assets (including the retail gas businesses in Perth, Sydney and Melbourne). But with all this done, where would it leave Alinta, the former state government-owned gas supplier, in its role and obligation to WA? Alinta is constitutionally obliged to maintain its headquarters in WA, but just which part of the Alinta/AGL business would be in Perth is unclear. While chief executive Bob Browning said it was probable that one of the demerged entities would be housed in the current Alinta corporate entity in Perth, he couldn’t say which one. Analysts seem more certain of Alinta’s future in WA, saying that the merged entity would be Alinta’s business and that it would be headquartered and largely run from Perth. Patersons Securities industrial analyst Robert Gee said the main cost savings in the Alinta proposal were to be gained from AGL’s Sydney head office. “Bob Browning and his team believe they can cut $100 million in costs from the AGL business, which will mean the removal of a lot of head office responsibilities from AGL,” he said. “There is no need for two boards in one public company and a number of obvious synergies will be achieved, with functions like accounting, finance, human resources and other administration consolidated to WA.” But, Mr Gee said the operational requirements of AGL’s business would require it to retain a significant presence in Sydney. “From Alinta’s point of view I don’t envisage any divestment of assets, and they don’t seem to think they will have any problems with the ACCC on the competition issues,” he said. Aside from the economies to be achieved between the two organisations, the merger is a question of whether Alinta can deliver the cost savings it is promising to justify the asking price. Proponents of the merger say the track record of Mr Browning and his team would suggest Alinta is in a strong position to do so, but on the other hand AGL’s inability to carve out the cost savings to date casts doubt on whether they are achievable. The merger machinations began when Alinta acquired a 10 per cent stake in AGL last week, making it AGL’s largest shareholder. Alinta planned to discuss a merger with AGL but initially found the gas heavyweight in no mood to talk. It then upped its stake in AGL to 12.9 per cent and again to 19.9 per cent, spending nearly $2 billion in the process, bringing AGL to the table for merger discussions.