Gas giant soaks up the sun – AGL acquires Solgen & Epho!

Origin’s long-term rival AGL has recently made big moves within the solar market. On the 9th of March 2021 AGL announced its acquisition of Solgen and Epho. Both companies are in their own rights market leaders and rank within the top five players of the C&I space; with Solgen leading volume in the commercial (15kW-100kW) segment as well as really standing out in the LGC market. Even though AGL already has a strong market presence within the STC commercial space – ~8.4MW delivered since last year, its renewable division suffered from significant losses in FY20 of $52M; according to its financial statement. In contrast Origin’s underlying EBITDA for its Solar and Energy services in FY20 shows a profit of $33M.

So then, will AGL be able to beat out Origin? Is acquiring two of the market leaders to solidify your renewables arm a smart move? 

AGL have reached a sweet spot of scale and impressive operations through its acquisitions noting that the number of STC’s generated from the combined volume of AGL and its subsidiaries will greatly outstrip Origin’s commercial STC volume; by more than three times. However, Origin will still be an overall worthy competitor if we consider their dominance in the residential market (sub-15kW) even despite AGL’s acquisitions. STCs are only one side of the equation and it’s the LGC market where Solgen and Epho really stand out. Bringing these into the fold could help bolster AGL’s dominance within the greater market.

As Danin Kahn (former CEO of Todae Solar) points out in this article economies of scale apply to C&I solar companies that create a hurdle for the business to grow beyond a small size, but beyond the hurdle of 80 employees there is a sweet spot that unfolds. Companies with very few employees have a lower cost per employee but also lower revenue per employee. As companies grow to about 20-30 employees the revenue per employee increases as the company grows and takes on more work, but the average cost per employee is still relatively low. This is because most of the employees are acutely focused on either selling or delivering revenue – without many support services (and likely without robust systems and processes). Once companies scale to 50-90 employees, we see the revenue per employee decline as well as the average cost per employee increase. This is a compounding negative that is caused by the company’s inability to grow revenue without more support services and senior people that either don’t directly bring in sales or don’t directly deliver revenue, such as IT, HR, marketing, finance, process improvement, safety, etc.

This issue may be further compounded from the time-lag created by larger organisations where bureaucracy and red-tape can interfere with the businesses flexibility (nimbleness) to adapt to market changes. History has shown electricity retailers commonly find it difficult to integrate solar retailers, a large part of which is because of the nimbleness with which solar retailers can operate. Furthermore, a discussion around the self-cannibalisation of AGL’s other energy service streams must be considered. Offering competitive rates for solar installations are surely to detract from profits generated elsewhere within the company. We’ll have to wait and see how AGL integrates Solgen and Epho’s resources and competencies into their business model and how lean of a structure they can create. Depending on how AGL integrates Solgen and Epho some support roles may be made redundant as the focus shifts to retaining top talent from their subsidiaries.

Find all the data and analysis surrounding AGL’s acquisition in this month’s Insights report.