The AGL Energy Limited (ASX: AGL) share price could be stuck at 17-year lows for a while on speculation that it needs to desperately raise cash to complete its much-touted demerger.
The separation of its power generation and retailing businesses is a key plank of the embattled group's turnaround strategy.
But alas, many experts aren't convinced management can execute without a large capital injection.
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Painful capital raise for the sagging AGL share price
The ideal way to get the extra cash is to do a capital raise, but such a move is unappetising after the AGL share price lost around half its value in the past year. It lost another 0.2% this morning as it traded at $8.31 – close to it's lowest since 2004.
What's worse is that UBS estimated AGL will need around $600 million in new cash, reported the Australian Financial Review.
That's no small raise as the amount would represent around 12% of AGL's current market cap.
Why AGL needs cash
AGL will need the cash for two primary reasons, according to the experts. The first is to maintain its investment-grade credit rating for both the spin-off and parent entity.
The ability for the group to hold on to its valued credit rating, which gives it access to relatively cheaper debt, is in doubt as UBS cut its wholesale power price forecasts.
This will also affect the Origin Energy Ltd (ASX: ORG) share price, but at least Origin has exposure to rising oil prices through its LNG project.
Demergers and spin-offs are an expensive business
MST Marquee analyst Mark Samter also warned that investors are overlooking balance sheet risks for the separated AGL entities, according to the AFR.
He noted that demergers are an expensive business. The Woolworths Group Ltd (ASX: WOW) split with its alcoholic drinks division Endeavour cost it $280 million. The divorce between BHP Group Ltd (ASX: BHP) and South32 Ltd (ASX: S32) was even more expensive at US$738 million.
"Now, I am sure that their adviser is absolutely chomping at the bit to raise equity for them, and if you raise at a big enough discount with a placement, maybe you can get the institutional shareholders that are so notable by their absence on their register back," the AFR quoted Samter.
"But as always I struggle to see how these things aren't mutually exclusive with a valuation anywhere close to the current share price."
Uncertainty to cap the AGL share price
What's interesting is that Samter is willing to put his money where is mouth is. He promised to take a half-page ad to apologise if AGL successfully demerged without raising capital and the combined value of the businesses exceeded AGL's current market cap of $5.2 billion in 12 months.
AGL is expected to provide details on the structure and timing of the demerger by June 30.
In the meantime, it's hard to see the AGL share price making any meaningful recovery with this cloud over its head.
