Accel, the vehicle that would contain the coal-fired generators, would have an uncertain future. It would have limited, if any, access to new capital. It would, as Cannon-Brookes has said, be a stranded asset essentially trying to maximise the cash from operating the generators until their closure.

AGL shareholders have already experienced the loss of nearly three-quarters of the value of their shares over the past five years as the accelerating intrusion of renewables into the grid has undermined the economics of coal-fired power. Cannon-Brookes can argue that the past is a convincing guide to Accel’s future.

Coal-fired power stations are already being shut down far earlier than previously anticipated.
Last year EnergyAustralia brought forward the planned closure of its Yallourn plant in Victoria by four years; this year Origin Energy announced the timing of the closure of its Eraring plant would be accelerated by seven years to 2025 and AGL itself truncated the planned timelines for the closure of its Bayswater and Loy Yang A generators by three years, to 2035 and 2045 respectively.

Cannon-Brookes isn’t making a purely emotional appeal. The demerger, which would split AGL’s massive retail customer base and most of its renewable generation assets from its coal-fired generators, is a venture into a murky and potentially wealth-destroying future.

There is therefore no certainty over the lives of the core assets in Accel – the risks are all on the downside – and therefore no certainty as to their value.

Cannon-Brookes will also strike a nerve with some AGL shareholders when he argues there is more value to be preserved from maintaining AGL’s “gentrader” structure than in breaking it up.

While the AGL board argues that separating its retail operations from the coal-fired generators will enable greater focus, not only would Accel be capital-starved but the group would lose the natural hedge that comes with the integration of generation with retail customers.

The reason the major energy utilities pursued vertical integration was to secure customers for their generators (or vice versa) to reduce the need for expensive financial hedges in what is a volatile electricity market. AGL’s plan, even if the two entities retain links, would leave them both more exposed to that volatility and risk.

Monday’s unfortunately-timed announcement of an outage at Loy Yang A that will cost AGL an estimated $73 million pre-tax ($50 million after tax) highlighted a different type of risk to the smaller and less-diversified Accel once it were separated from the more stable and less operationally vulnerable retail business.

The other challenge Cannon-Brookes poses to the AGL board is that he has a strategy for AGL’s future if the demerger is derailed and the board doesn’t, or at least doesn’t have one it has articulated. There doesn’t appear to be a Plan B other than the status quo, which would leave the board hanging in the wind if their demerger is voted down.

The status quo, with AGL continuing to be capital constrained because of its coal-fired generators, doesn’t stack up well against what Cannon-Brookes and his then senior partner, Brookfield Asset management, were proposing when they proposed bidding more than $8 billion for AGL earlier this year.

Their plan was to buy AGL, keep it is a single entity, and then invest up to $20 billion to displace AGL’s 7 gigawatts of capacity with 8 gigawatts of renewables, fast-tracking the closures of the Bayswater and Loy Yang plants.

The retail business is critical to that plan, both to generate cash and to provide a core customer base for the renewable power. In Cannon-Brookes’ eyes, the sum of AGL parts is -- contrary to the board’s view that the demerger will unlock and enhance value -- greater than that of the standalone businesses.

The original Brookfield/Cannon-Brookes plan envisaged access to capital and a scale of investment that AGL, with a market capitalisation of $5.8 billion, could never contemplate.

Under the original proposal – the final $8.25 a share pitch that the AGL board rejected – it would have been the deep-pocketed Brookfield and Cannon-Brookes’ money exposed to the uncertain outlook for generation, not AGL’s shareholders.

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Conspicuously absent from Cannon-Brookes’ latest tilt at AGL, at least for the moment, is Brookfield.

Private equity tends not to engage in overtly hostile activity, wanting the security of due diligence and board support for all-or-nothing scheme of arrangement deals before it puts large amounts of capital at risk.

When it, and Cannon-Brookes, walked away from AGL earlier this year after being rejected by the board a second time the giant Canadian asset manager made it clear it remained interested in AGL and the outcome of the demerger vote. There’s no reason to doubt that it would re-establish its relationship with Cannon-Brookes if he succeeds in blowing the demerger up.

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