KEY POINTS:
Origin Energy, Australia's second-biggest electricity and gas retailer and majority shareholder of Contact Energy, rejected a merger bid from rival AGL Energy as too low.
AGL's proposal to buy Origin at the market price of its shares "does not properly reflect the relative fundamental value that each company would contribute," Origin chairman Kevin McCann said yesterday.
AGL shares fell 2.1 per cent, while Origin stock slid 0.7 per cent, valuing the company at A$7.5 billion ($8.4 billion).
A merger would create a company supplying power and gas to half of eastern Australia's households.
AGL may have to offer a 20 per cent premium to reflect the greater cost savings Origin would contribute to a combined company, Merrill Lynch said recently.
"AGL is very keen to get hold of Origin's gas reserves, and generally the market feels there's probably more upside for AGL in doing the deal than there is for Origin, certainly in the short term," said Bruce Low, at ABN Amro Asset Management in Sydney.
"The consensus was that Origin would probably feel they should get more of the upside synergies."
AGL is still committed to pursuing a merger on the terms proposed, said spokeswoman Jane Counsel.
The company "strongly disagrees" with a number of conclusions reached by Origin in the study of the proposal, she said.
- BLOOMBERG
