Cash could break bid deadlock

SYDNEY - The Australian Gas Light Co and smaller rival Alinta are locked in a A$12 billion ($13.75 billion) merger stalemate, and it could take a cash sweetener to break the deadlock.

Both firms want a combination that would save costs and give a merged entity 38 per cent of Australia's energy customers in a market forecast to grow nearly 40 per cent by 2020.

The sticking point? Who should run the new company.

Last month, AGL rejected Alinta's informal proposal for a friendly scrip-based merger that put Alinta management in charge. This week, the Alinta board turned down an official bid from AGL that was based on the same share-for-share exchange ratio, but put its bosses in charge.

In either scenario, AGL shareholders would own around 70 per cent of the new company.

The most likely next move, say analysts, is a formal bid from Alinta that includes a cash sweetener. Alinta, although just a third of the the size of AGL by market value, has snared a 19.9 percent stake in its rival. Unlike AGL though, it has no formal bid on the table.

"The ball is in Alinta's court," said Frank Zhu of Australian Ethical Investment. "They've already spent some money, which AGL hasn't. They'll pick their best moment to act, but I'm sure any fresh bid they table will need to involve some cash element."

A deal would add AGL's 3 million customers in Australia's east to Alinta's 500,000 in the west, and combine portfolios of highly-regulated power generation and distribution assets.

Nobody expects a quick resolution.

"Anything is possible now, and this could run for quite some time," said Robert Gee, equity analyst at Patersons Securities. "Neither will relinquish control without a fight, or without the control premium each saw as lacking in the other's bid."

A rival bid by Alinta would be what is known as a Pac-Man defence, or reverse bid. Named after a popular electronic game of kill-or-be-killed - a Pac-Man move could trigger a race by both companies to win 50 per cent of the other, with shareholders choosing their favourite management.

AGL wants its new chief executive Paul Anthony, a Welshman who led the privatisation of Contact Energy, to run the combined energy business. Alinta's Bob Browning wants the same job. AGL wants Browning to run infrastructure.

- REUTERS