Why is the Origin share price not rising closer to Brookfield's takeover price?

Investors seem to be leaving some money on the table with the Origin takeover bid. What gives?

Key points
  • Brookfield and an investment partner are trying to buy Origin shares
  • Despite the current bid being $9, the share price is sitting around 20% lower than that
  • One reason could be that Brookfield failed to buy AGL after a previous takeover bid

The Origin Energy Ltd (ASX: ORG) share price currently doesn't reflect the full offer price that it recently received. What's going on?

Origin is an ASX share involved in energy generation and energy retailing. In other words, it sells energy to households and businesses.

But, its time as a company on the ASX may be numbered because it has received a hefty takeover offer.

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Image source: Getty Images

Takeover bid

Earlier this week, it was announced to the ASX that Origin had received a non-binding, indicative offer at $9 per share.

This follows earlier proposals to acquire Origin at $7.95 cash per share on 8 August, and another in September to buy at an indicative price of between $8.70 and $8.90 per share.

The bid has come from Brookfield and MidOcean Energy. The offer values Origin at $18.4 billion on an enterprise value basis. Brookfield would buy the energy markets business, and MidOcean would buy the integrated gas business.

The offer of $9 per share represented a 54.9% premium to the closing price of $5.81 on 9 November 2022.

Origin has entered into a confidentiality and exclusivity agreement with the consortium. Under the terms of the agreement, either party can terminate the exclusivity provisions after five weeks and four days, with one week's notice.

The Origin board intends to grant the consortium the opportunity to conduct due diligence to enable it to put forward a binding proposal.

Based on current information and market conditions, if the consortium makes a binding offer of $9 cash per share, then it is the "current intention of the Origin board to unanimously recommend that shareholders vote in favour of the proposal".

Why is the Origin share price so far under the bid?

If Origin shares were to rise to the bid price, that would represent an increase of around 20%.

That's a lot of money that investors are leaving on the table, if a binding bid comes through. Why is it so much lower?

Origin itself said "if" the consortium makes a bid. There is also the agreement that allows the consortium (and Origin) to walk away from the exclusivity agreement. Those sorts of disclosures aren't the biggest indications that a deal is virtually certain to happen.

I think it's also worth pointing out what happened with the Brookfield bid for AGL Energy Ltd (ASX: AGL). Brookfield eventually walked away from the process and a deal didn't happen.

Perhaps some investors are thinking there's a risk that Brookfield may not follow through with this takeover either.

Only Brookfield and its consortium partner know how motivated they are to make a deal happen. But, it's worth noting that the consortium has made three bids for Origin. So, in my view, there seems to be a good chance that a deal could happen. The board have indicated they would accept a $9 per share bid.

The Origin share price closed on Friday down 3.19% at $7.58.

Foolish takeaway

Going for Origin shares isn't the sort of (short-term) investment I'd personally go for. But, I'd understand if some investors thought that it was an opportunity, if they believed the deal was likely to go ahead.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Brookfield Asset Management. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has recommended Brookfield Asset Management Inc. CL.A LV. 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 Scott Phillips.

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