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AGL Energy Ltd’s discounted rights issue: What investors need to know

After its results were released last week, AGL Energy Ltd (ASX: AGK) finally came out of a trading halt yesterday, announcing the commencement of the retail portion of its rights issue.

AGL Energy offers existing shareholders a 1-for-5 renounceable entitlement offer to acquire AGK shares at a price of $11 each, a substantial discount to the group’s price over the past twelve months.

The money raised through the retail ($717 million) and institutional ($515 million) placements combined with around $300 million of bank debt will be used to fund the acquisition of Macquarie Generation coal powered assets in New South Wales (total cost more than $1,505 million).

The acquisition is expected to contribute around $75 million of earnings to AGL’s bottom line in this financial year.

What you need to know about the acquisition:

  • AGL’s power generation capacity will increase by more than 180%
  • AGL will now produce all of the energy it requires to meet customer demand (reducing need for purchasing power from third-party suppliers)
  • After the acquisition AGL will be the largest single electricity supplier in the National Electricity Market
  • Repeal of the carbon tax and current and expected ongoing low coal prices will support earnings into the future
  • Energy demand per household is expected to continue to gradually decline over the coming decades due to greater efficiency and more solar power usage

I have previously written about my caution for the takeover of MacGen, fearing that it would lead to a dilution of earnings for shareholders which, combined with long-term opposition to coal power would lead to poor investment outcomes over the long term.

However the very attractive offer price combined with the subsequent repeal of the carbon tax and expected ongoing low coal prices have caused a rethink.

All in all I expect AGL’s acquisition to deliver good returns to investors over the medium term, although I still remain wary about the company’s future over a decade or longer.

You don’t need to spend time predicting the vagaries of coal power and government policy over the next decade to earn a decent return on your investment however.

One of our favourite shares – one I also own – recently reported substantially better results than AGL Energy, and boasts a considerably clearer pathway to future earnings growth as well.

These factors and others combined with a proud and reliable growth record have seen this small company declared The Motley Fool‘s Top Stock of 2014-2015, and we think this is just the beginning.

Our top analyst team has written a free report which we’re sharing with all interested investors.

If this is you, simply click on the link below and enter your email address – it takes less than 30 seconds – and we’ll send it to you, completely FREE!

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Motley Fool contributor Sean O'Neill doesn't own shares in any company mentioned.

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