AGL Energy, Australia's largest energy retailer, abandoned a proposed A$14 billion (US$10.9 billion) tie-up with rival Origin Energy, sending Origin's shares tumbling.
AGL said on Wednesday the benefits of a combined group could only be achieved through an agreed "nil-premium" merger, and since Origin had rejected the proposal, AGL had decided not to pursue the deal.
"It does come as a surprise that AGL didn't try to make a counter offer after having promoted the benefits of this merger so aggressively," said ABN AMRO analyst Jason Mabee. "As for what's next, nothing is really going to change for Origin. It will still go about its strategy of magnetizing its gas assets. But for AGL, it would probably start scouting around to buy more stakes in various gas projects."
AGL in January proposed to Origin a tie-up which would create Australia's largest electricity and gas provider worth about A$14 billion.
Under the proposal, the tie-up would be based on an exchange ratio of 1.86 Origin shares for each AGL share if Origin was to be the continuing entity. AGL said it was also open to implementing the tie-up through an acquisition by Origin.
A tie-up between the two could result in an annual cost savings of about A$150 million by removing duplicate operations and could boost earnings per share (EPS) by more than 10% for shareholders of both companies, AGL has said.
Origin rebuffed the proposal last month and said that a nil-premium merger did not reflect its fundamental value and that the divestments needed to satisfy the competition regulator's demands would result in significant loss of value.
But Origin said that it would be open to alternative proposals, leaving the door open for an improved offer.
AGL also said it decided not to pursue a takeover because "a merger ratio based on current market prices would not be attractive to AGL's shareholders". According to Reuters data, AGL has a market value of A$6.8 billion, while Origin is worth about A$7.5 billion.
AGL, which owns power plants and stakes in oil and gas fields in Papua New Guinea (PNG), has been aggressively boosting its stakes in gas fields to reduce its purchases of gas on the wholesale market for sale to its retail customers and for use in power generation.
Since a pipeline project bringing gas from PNG to Australia's eastern seaboard was shelved last month, the need to secure more gas resources has become increasingly urgent, analysts said, adding that prominent coal seam gas producers would likely be AGL's new target.
Sydney-based AGL entered a joint venture with coal seam gas firm Sydney Gas last year to develop a coal seam gas field in Sydney. Last week, it also won a bid against U.S. investment firm TCW to acquire a 27.5% stake in coal seam gas producer Queensland Gas for A$327
Origin is Australia's only vertically-integrated energy company with oil and gas production assets accounting for about a quarter of its revenues, which have helped to offset tighter margins in its traditional retail energy business.
Sydney-based Origin has a 23% market share in the gas and electricity business in eastern Australia, closely trailing AGL's 26%.