AGL (ASX:AGL) share price on watch following demerger update

Another ASX 200 company is planning to split into two…

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The AGL Energy Limited (ASX: AGL) share price will be one to watch closely on Wednesday morning.

Why is the AGL share price on watch?

All eyes will be on the AGL share price today following the release of an update on its demerger plans.

According to the release, the company has confirmed its intention to undertake a demerger to create two leading energy businesses with separate ASX listings.

What’s next?

The release explains that AGL Energy will become Accel Energy, an electricity generation business focused on the accelerating energy transition and the redevelopment of its sites as low-carbon industrial energy hubs. It will be led by Chairman Peter Botten AC, CBE and CEO Graeme Hunt.

Accel Energy will then demerge a new entity, AGL Australia, which will be a multi-product energy-led retailing and flexible energy trading, storage and supply business. AGL Australia will retain the AGL brand. The new business will be led by Chair Patricia McKenzie and CEO Christine Corbett. The latter has been Chief Customer Officer of AGL Energy since July 2019.

The company intends to hold a scheme and general meeting to enable shareholders to vote on the proposal, with the aim of completing the demerger in the fourth quarter of FY 2022.

After the demerger, AGL Energy shareholders would hold one share in each of Accel Energy and AGL Australia for every share they own in AGL Energy on the applicable record date.

Management notes that that Accel Energy is expected to retain a minority ownership interest of between 15% to 20% in AGL Australia following the demerger. This will allow Accel Energy to share in the anticipated value creation in AGL Australia following demerger and provide balance sheet flexibility.

An inflection point

AGL Energy’s Chairman, Peter Botten, said: “The impact of recent challenging market conditions on our financial performance emphasises that AGL Energy is now at an inflection point, as the transition of the energy sector accelerates, driven by the rapid evolution in renewables and decentralised energy technology, customer needs and community expectations.”

“After careful consideration, the Board has confirmed that AGL Energy should move forward as two independently-listed companies as the Board believes this will be in the best interests of shareholders. The clarity of purpose created by this change will protect shareholder value, enabling each business to focus on their respective strategic opportunities and challenges presented by the accelerating energy transition,” he added.

Earnings guidance

AGL Energy has also provided the market with guidance for FY 2021. It revealed that it continues to expect underlying EBITDA to be at the low end of its previous guidance range of $1,585 million to $1,845 million.

On the bottom line, underlying net profit after tax is expected to be around the middle of the previous range of $500 million to $580 million. This includes approximately $90 million of insurance proceeds relating to the FY 2019 Unit 2 outage at the Loy Yang A power station and is consistent with previous guidance.

However, management has terminated its special dividend program because of its demerger plans. This means AGL will no longer pay out an additional 25% of underlying profit after tax for the FY 2021 final dividend or in FY 2022. Nor will it underwrite the dividend reinvestment plan for the FY 2021 final and FY 2022 interim ordinary dividends during the demerger planning period.

The AGL share price is down 25% in 2021. Investors will no doubt be hoping this demerger update is the catalyst to getting its share price heading in the right direction again.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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