Sydney Gas, AGL merger 'on the cards' 23/12/2008 7:01:15 PM
Trading in the shares of Australia's largest energy retailer AGL Energy Ltd and coal seam gas (CSG) producer Sydney Gas Ltd was halted on Tuesday, amid speculation the joint venture partners may be planning a merger.
If the two companies do pursue a tie-up, it will be the latest instalment in a rash of consolidation in the CSG sector this year.
Sydney Gas told the Australian Securities Exchange it needed the trading halt ahead of an announcement "in relation to a takeover bid" while AGL asked for its halt pending an announcement about "a possible material transaction".
Brokers said the trading halts could prelude major news announcements involving both companies, which are in a joint venture to explore the CSG potential of the New South Wales Hunter Valley region.
CommSec market analyst Savanth Sebastian said it appeared the events were related.
Ord Minnett resources specialist Peter Arden agreed, saying if the pair did merge, cashed-up AGL would get access to Sydney Gas' NSW CSG reserves and resources.
The assets could be more easily commercialised with AGL's financial and technical assistance, he added.
Mr Arden said Sydney Gas had been a poor performer but it had strategic positions in NSW gas projects that would fit well into AGL's portfolio.
On its website, Sydney Gas describes its joint venture with AGL as "the perfect complement".
Mr Arden said Sydney Gas was undercapitalised and had been challenged by the geological complexities of its CSG assets.
Meanwhile, AGL has moved from being a purely downstream energy company focused on gas retailing to include upstream projects such as exploring for and producing gas.
"It really looks like a potential re-run of a transaction attempted about two years ago when Queensland Gas Company Ltd made a bid for Sydney Gas to get the benefit of access to the Sydney market," Mr Arden said.
"That didn't go through so AGL has stepped in and is potentially doing the same thing.
"There's certainly scope to see how the tie-up could work to AGL's benefit."
AGL is on the hunt for acquisitions after last week finalising the sale of various assets in Papua New Guinea for about $US800 million ($A1.17 billion).
AGL pocketed about $1.12 billion from the transaction after closing out oil and currency hedges.
It also recently sold its stake in Queensland Gas Company to UK-based BG Group for $1.2 billion.
AGL has just completed its acquisition of the Gloucester CSG project in NSW from engineering and construction company AJ Lucas Group Ltd and junior oil and gas explorer Molopo Australia Ltd for $370 million.
Notably, AJ Lucas was also in a trading halt on Tuesday pending an announcement about a "material transaction."
AJ Lucas is Sydney Gas' largest shareholder with a 19.99 per cent stake.
AGL also bought two wind farm developments projects from Investec Wind Holdings Pty Ltd for $14 million on December 9.
AGL managing director Michael Fraser said last week that the proceeds from the PNG asset sales would give the company capacity "to transact on future growth options".
CSG has evolved from being a fringe, speculative form of energy to a mainstream source in just a few years.
On Monday, CSG explorer Pure Energy Resources Ltd agreed to be taken over by CSG producer Arrow Energy Ltd in a $673 million cash-and-scrip deal.
Shares in AGL last traded at $15.45 while Sydney Gas traded at 27.5 cents, valuing the potential target at $110.7 million. AJ Lucas last traded at $4.15.
All three companies expect to make their announcements before the start on trading on Wednesday.
