AGL Energy announced on Monday it is backing off from its planned demerger, and with half the board headed for the exit, shareholders are at risk new management could be forced to sell assets at knock down prices to refinance debt, says Morningstar equity analyst Adrian Atkins.

Management hoped hiving off AGL’s coal generation assets into a separate business would allow a slimmed down AGL Energy to tap debt markets otherwise loathe to lend to fossil fuel businesses, says Atkins. With demerger plans trashed, management may sell assets to help cover the roughly $1.8 billion in bank and debt finance coming due over the next three to four years.

While selling the fleet of aging coal plants would raise money and reopen the door to credit markets, shareholders are unlikely to get a good price from any buyers circling the rudderless AGL, adds Atkins.

“It’s bad news for shareholders, they’ve been screwed over,” he says. “The demerger was the way for AGL to maintain the support of its banks. So now, how is it going to refinance debt? The banks put AGL in a difficult position and the activists have come in with the killer blow.

“What’s it going to do? It’s likely going to have to sell assets cheaply and when you’re a desperate company you don’t get a fair price for your assets”.

AGL withdrew its demerger proposal early on Monday, acknowledging it lacked sufficient support ahead of the 15 June shareholder vote following a relentless campaign by Mike Cannon-Brookes that had swayed institutional shareholders including Martin Currie and superannuation fund Hesta. Half the board will resign, with chief executive Graeme Hunt, chairman Peter Botten among the scalps. Australia’s oldest energy company announced a strategic review to consider “how the company moves forward.”

Dealing with debt is the “major strategic question” for AGL (ASX: AGL) now, according to Macquarie analysts in a note to clients on Tuesday. Keeping AGL together means profits remain dominated by coal generation, limiting access to capital markets. They estimate $1.8 billion in bank debt due to be refinanced in 2024 and 2025.

“The major strategic question emerges of debt financing and the implication of being a single company,” according to Macquarie. “One of the tenants of AGL’s proposed de-merger was that access to debt was getting harder given the bulk of earnings/revenue is coming from coal generation.”

Shares fell sharply at the opening bell on Monday before partly recovering as investors weighed the possibility of further takeover offers. Shares closed down 0.9% on Tuesday relative to the pre-announcement price.

Opponents of the demerger plan celebrated the backdown, with Cannon-Brookes tweeting that AGL’s decision was a “huge day for Australia”.

Professor Ariel Liebman, director of the Monash Energy Institute argues keeping AGL together will give it the financial firepower to invest in the transition to renewables, helping lower electricity prices for consumers and preserving shareholder value.

“AGL Energy, in its current state, can manage an accelerated retirement of its coal and gas fleet in a much more orderly manner… due to a long-lived asset-based balance sheet allowing it to raise capital easily to build large scale wind and solar generation and storage,” he says.

Two unpalatable options

Atkins sees two ways for AGL to shore up its finances: asset sales or a combination of an equity raise and dividend cut.

Any sale of the coal assets will struggle to get a fair price, says Atkins, with few buyers outside private equity groups or Mike Cannon -Brookes and Canadian Asset manager Brookfield.

Brookfield funds already own Victoria’s electricity transmission and distribution network and allowing them to buy AGL’s power plants, responsible for a third of generation in New South Wales and Victoria, creates too much market power, adds Atkins.

The Brookfield Global Transition Fund, which partnered with Cannon-Brookes on his two prior bids, seeks to bring carbon-intensive businesses into alignment with Paris climate accord objectives.

Forcing shareholders to bear the brunt via smaller dividends and diluted equity will be a bitter pill after years of share price underperformance. However, Atkins believes it will retain shareholder value over the longer term as higher wholesale prices begin to bolster the bottom line.

“AGL is finally positioned to have some good years after some bleak ones.”