Royal Dutch Shell Plc has taken the plunge into Australia’s energy market with a $418 million deal to buy ERM Power Ltd., the nation’s second-largest electricity retailer to commercial and industrial customers, as it drives toward a goal to become the world’s top power producer by 2030.
Shell had previously expressed interest in deeper involvement in Australia’s electricity sector as it pivots toward gas and power amid the global shift to cleaner energy. ERM owns two gas-fired generators, as well as the retail business, which Shell said will play an important role as Australia makes the switch away from coal-fired power. The deal is expected to close this year.
“This acquisition aligns with Shell’s global ambition to expand our integrated power business and builds on Shell Energy Australia’s existing gas marketing and trading capability,” Zoe Yujnovich, the company’s Australia chairman, said in a statement.
The cash offer of A$2.465 ($1.67) per share is a 43% premium to ERM’s closing price Wednesday and has the unanimous approval of ERM’s board. Company founder and major shareholder, Trevor St. Baker, also intends to vote in favor:
“Shell has the resources and networks to further ERM Power’s significant potential,” he said in a statement.
Australia’s energy sector is facing headwinds from a highly competitive retail market and regulatory intervention, which is having an impact on margins, Origin Energy Ltd. CEO Frank Calabria said in a statement to accompany the group’s annual earnings on Thursday.
“If the transaction proceeds, and Shell seeks to expand market share, we would see this as a competitive negative, at the margin, for incumbents AGL and Origin,” Rob Koh, utilities analyst at Morgan Stanley, said in a note to clients.
ERM’s shareholders would vote on the deal around early November, the company said, and directors plan to support the transaction in the absence of a superior proposal. “If there is somebody out there, then this is the opportunity for them to come forward,” CEO Jon Stretch said on a media call.
Luminis Partners is ERM’s financial adviser, with Herbert Smith Freehills acting as legal adviser. Shell is being advised by UBS Group AG and Ashurst.