The following section of Gilbert + Tobin’s 2022 Takeovers and Schemes Review explores the impact of environmental, social and governance (ESG) matters on public mergers and acquisitions in 2021.
2021 saw an increased number of public mergers and acquisitions in which ESG considerations were a key factor. More coming in 2022.
In 2021, companies worldwide, including Australia, had an increased focus on environmental, social and governance (ESG) matters. This was driven by growing attention by governments (both national and local), regulators, investors, financiers, customers, suppliers and the wider public on the manner in which corporates conduct their business. No longer is profitability in itself enough.
Increasingly, ESG leadership and a strong ESG strategy is a key indicator of a quality business that will deliver long term value.
During 2021, at least seven significant M&A transactions had ESG matters as a driving consideration. Many of these involved public company acquisitions (and therefore form part of the data set analysed in this Review), but others involved demergers with a public company spinning off a valuable business which some investors found challenging for ESG reasons.
| ESG M&A transactions in 2021 | ||||
|---|---|---|---|---|
| # | Target | Purchaser | Transaction type | Value |
| 1 | BHP petroleum business | Woodside | Merger | $38.5 billion |
| 2 | Woolworths / Endeavour | N/A | Demerger | $10.8 billion |
| 3 | AusNet Services | Brookfield consortium | Scheme of arrangement | $10.2 billion |
| 4 | AGL Energy / AGL Australia | N/A | Demerger | Approximately $9 billion |
| 5 | Oil Search | Santos | Merger by scheme of arrangement | $8.1 billion |
| 6 | Spark Infrastructure | KKR consortium | Scheme of arrangement | $5.1 billion |
| 7 | Tilt Renewables | PowAR consortium and Mercury NZ | Scheme of arrangement | $2.8 billion |
ESG M&A transactions in 2021
#
Target
Purchaser
Transaction type
Value
1
BHP petroleum business
Woodside
Merger
$38.5 billion
2
Woolworths / Endeavour
N/A
Demerger
$10.8 billion
3
AusNet Services
Brookfield consortium
Scheme of arrangement
$10.2 billion
4
AGL Energy / AGL Australia
N/A
Demerger
Approximately $9 billion
5
Oil Search
Santos
Merger by scheme of arrangement
$8.1 billion
6
Spark Infrastructure
KKR consortium
Scheme of arrangement
$5.1 billion
7
Tilt Renewables
PowAR consortium and Mercury NZ
Scheme of arrangement
$2.8 billion
We have identified three main drivers of ESG M&A in 2021:
companies divesting assets with ESG concerns;
energy + resources assets being combined to support companies’ long term ESG strategy; and
infrastructure investors and superannuation funds investing in the energy sector, particularly renewable energy.
Demerging assets with ESG concerns
In 2021, Woolworths and AGL Energy each divested or demerged assets that they considered to be incompatible with their longer term ESG goals or standards:
Combining assets to support long term ESG strategy
In 2021, BHP agreed to merge its petroleum operations with Woodside, and Santos and Oil Search agreed to merge. These transactions were presented to investors as mergers to support longer term ESG initiatives. That said, the BHP / Woodside transaction could also be considered as BHP exiting assets that may not be compatible with BHP’s longer term ESG objectives.
ESG benefits of these transactions were presented to investors as follows:
Investment in energy
In 2021, infrastructure investors and superannuation funds pursued investments in energy, in particular renewable energy. Key transactions included the PowAR consortium and Mercury NZ’s acquisition of Tilt Renewables, KKR-led consortium’s acquisition of Spark Infrastructure and Brookfield-led consortium’s acquisition of AusNet Services. Further details of these transactions are set out below:
While not the focus of this Review, in 2021 infrastructure investors also pursued private mergers and acquisitions in renewable energy. This included:
Shareholder ESG activism
In 2021, activist shareholders made ESG issues important in mergers and acquisitions. For example, JBS SA’s $426 million acquisition of Huon Aquaculture (one of Australia’s largest salmon producers) was subject to an ESG campaign from Dr Andrew Forrest, controller of the second largest shareholder in Huon, focusing on environmental and animal welfare standards (see page 44 for further details).
ESG driven investment
In 2022, ESG investors are taking are more active role in making ESG issues important in M&A. For example, shortly before this Review was released, a consortium of Brookfield (Canadian asset manager) and tech billionaire Mike Cannon-Brookes (co-founder and co-CEO of Atlassian) made two non-binding takeover proposals to acquire AGL Energy at modest premiums to the AGL share price. As part of the proposal, the consortium suggested a decarbonisation plan for AGL that involved AGL’s target for “net zero” emissions being brought forward by 12 years to 2035 and a further $10 billion being invested in the energy transition to close down AGL’s remaining coal power stations by 2030, 15 years earlier than AGL’s current timelines.
Each proposal was quickly rejected by AGL’s Board on the basis that it materially undervalued AGL, was not in the best interests of AGL shareholders and that AGL’s proposed demerger of AGL Energy (discussed above) would deliver better value for AGL shareholders. Shortly following this rejection, Mr Cannon-Brookes tweeted that the consortium would now be “putting our pens down - with great sadness”. Notwithstanding that, one can’t help but feel there may be some further steps in this dance - if not by Brookfield / Cannon-Brookes then by others. One thing is for sure: companies owning coal fired power stations are certain to attract a lot of ESG commentary and investor interest in 2022 and beyond. It will be interesting to see how boards of these companies respond.
Predictions for 2022
In 2022, we expect to see:
continued mergers and acquisitions from public companies divesting assets that are less conducive to ESG-conscious investment (e.g. legacy fossil fuel assets) and increasing investment in ESG-oriented assets (e.g. renewables, hydrogen, lithium, carbon capture and storage);
M&A activity in the energy sector continuing to be an area of activity (with speculation that Origin Energy will separate its retail business and / or demerging its upstream/downstream gas business) and ESG investors taking a more active role (with Brookfield / Cannon-Brookes takeover bid for AGL being representative of what we’re likely to see more of);
M&A activity in other ESG sensitive sectors such as agriculture and food, financial services and healthcare; and
increased focus by bidders on ESG as part of their due diligence (it now being common place for many acquirers, particularly funds, to commission stand alone ESG due diligence reports).
However, as one would expect, M&A activity involving ESG considerations will ultimately be determined by overall commercial and financial considerations (in addition to ESG factors) including capital allocation, financial return and business strategy.