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European utilities ready for new wave of mergers

European utilities ready for new wave of mergers


Spanish power company Gas Natural (GAS.MC) has fired the starting gun in what is expected to be the biggest upheaval among European utility companies for a decade.

Chairman Isidre Faine has contacted his counterpart at Portuguese rival Energias de Portugal (EDP) about a 35 billion euro ($40 billion) deal to create Europe’s fourth biggest utility firm by market value, according to sources.

While the companies denied on Tuesday there were talks, bankers and analysts say a new Iberian power champion would threaten the dominance of France’s EDF (EDF.PA) and Italy’s Enel (ENEI.MI) and could unleash a wave of European mergers and acquisitions (M&A) in a sector ripe for consolidation.

The impetus for change is partly coming from the growing shift to green energy sources.

Supplies of ever-cheaper wind and solar power are surging in Europe, forcing down wholesale electricity prices and posing a threat to the traditional model of centralized power generation and distribution from large coal, gas and nuclear plants.

Utility companies are fighting back by joining the shift to renewables, as well as offering customers digital devices to keep closer tabs on their power consumption. As one banker puts it, power companies need to develop a “Utility 2.0 strategy”, focused on renewables, networks and retail customers.

Getting bigger through acquisitions would help utilities manage the transition better, and the impending loss of public subsidies and preferential access to power networks that have cushioned utility revenues is also spurring consolidation.

The new rush to merge comes after some tough years. Several utilities had to swallow hefty writedowns after a wave of acquisitions a decade ago as the traditional power generation model, and nuclear power in particular, came under pressure.

Now, companies such as Gas Natural and Germany’s RWE (RWEG.DE) have cleaned up their up balance sheets to make it easy to carry out acquisitions or share swaps, analysts say.

“A lot of mistakes have been made with respect to big ticket M&A in the past. Everyone is keen to avoid new missteps,” said one banker specializing in utility companies.

The Stoxx Eurozone utilities index .SX6E lost as much as 60 percent of its value over the past decade but has rallied strongly in 2017, helped by outages at EDF reactors pushing winter power prices up and a German court declaring a nuclear fuel tax to be illegal, triggering repayments to companies.

Over the past six months, the index has gained more than 15 percent, while the broader index is 7 percent higher.

“The sector is finally getting to the point where it can move on from a decade of value destruction … Confidence around utilities’ sustainable cash-flow generation could grow,” said Deutsche Bank in a research note.

Germany at the Heart

Spain may have fired the starting gun but Germany is at the heart of the current takeover speculation. The country’s largest utilities, E.ON (EONGn.DE) and RWE, have separated their faster-growing green energy and retail operations from their struggling centralized power businesses.

E.ON has retained the renewables business and put its old power plants in a company called Uniper (UN01.DE). RWE, on the other hand, kept its traditional plants and put the green and retail businesses in a new company called Innogy (IGY.DE).

But with market capitalizations of about 19 billion euros, E.ON and Innogy are less than half the size of southern European renewable energy giants Enel and Iberdrola (IBE.MC), at 56 billion euros and 50 billion euros respectively.

The Italian and Spanish firms started their switch to higher-earning activities such as solar power and transmission and distribution grids a decade ago.

Activity is heating up in France too, where Engie (ENGIE.PA) Chief Executive Isabelle Kocher is pushing the former monopoly gas utility to focus more on grids and renewables.

Several investment banks are trying to engineer a share swap between Engie and RWE which could create a Franco-German energy giant, sources said in May.

“Enel and Engie are really active, analyzing everything. German companies are ready to do a domestic merger, or to be bought by a foreigner,” said one utilities investment banker.

Enel has renewables capacity of 37 gigawatts (GW), of which 27.4 comes from hydro plants and 6.5 GW from wind power. Innogy has a green energy capacity of just 3.7 GW, mainly in wind.

“Everybody is talking to everybody. But there are only few deals which really make sense. Iberdrola-Innogy may be one of them. But mainly it’s about smaller asset disposals, about streamlining at times of more competitive markets and increasing cost pressures,” another utilities banker said.

Iberdrola, Europe’s second-largest utility by market value, is working with U.S. investment bank Morgan Stanley to study opportunities while Gas Natural has turned to Citigroup for advice, according to people close to the situation.

Enel has repeatedly denied any interest in Innogy and that big deals tend to destroy value. “All this M&A talk in Europe, it is just cinema,” Enel CEO Francesco Starace told Reuters.

Potential bidders are also circling Uniper, bankers say.

Finland’s Fortum (FORTUM.HE) is said to be interested in the German company’s Scandinavian assets but may be hesitant to add to its carbon emissions by acquiring Uniper’s coal and gas plants, which account for the bulk of its operations.

Banking sources said Uniper was also a target for Czech rivals CEZ (CEZP.PR) and EPH, but they cautioned that its 6.2 billion euro value, boosted by a 70 percent rise in its shares since it was spun off in September, might cool suitors’ ardor.

Infrastructure Funds

Besides the strategic shifts shaping the sector, demand for deals is also coming from infrastructure funds, insurance companies and pension funds.

They are all hunting for assets to generate steady, reliable yields as the low returns from fixed-income securities they have traditionally held are making it increasingly difficult for them to fund their liabilities.

But rather than buying companies focused on green energy, funds are increasingly buying a minority stake in the renewable energy assets themselves, leaving the developer as the main operator with a majority ownership.

BlackRock’s (BLK.N) renewable infrastructure investment platform launched in 2012, for example, now manages more than $4 billion in client assets, mostly wind and solar projects.

Infrastructure funds are among five bidders expected to place binding offers in September for the Italian assets of Gas Natural, which is working with Rothschild on the sale.

Funds are also expected to bid for Steag’s municipal heating activities, which the German utility, owned by seven local municipalities, is selling with the help of Rothschild, people close to the matter said.

Source: reuters
Anand Gupta Editor - EQ Int'l Media Network


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