09 Mar 2016 – Electricite de France’s (EDF) [EPA:EDF] potential stake sale in Reseau de Transport d’electricite (RTE) could fall short of its entire minority holding, sources said.
Last month, The Times reported EDF is likely to sell a stake in RTE after Chairman Jean-Bernard Levy said a stake sale was granted conditional approval from regulators. The report pegged the likely stake amount at 49% following a strategic review of the unit, first reported in January 2015. Sale interest in RTE is being driven by EDF’s need to make around EUR 6.5bn of divestments in 2016 to maintain its investment spend, according to previous press reports.
The key factor affecting the amount the company needs to raise is the ongoing debate over the Hinkley Point C nuclear project in the UK, the second banker said. The project is expected to cost around GBP 18bn. In light of the internal disagreement, CFO Thomas Piequemal resigned and was temporarily replaced by Xavier Girre.
The French power company is unlikely to sell the full 49% it has at its disposal, because it would look to retain a sizable stake to sell further down the line once the initial transaction has been completed, according to a source briefed on the company’s strategy and a sector banker. Retaining a partial stake would also allow EDF to seek a higher multiple in the future if there is an improvement in French power markets, the source said.
RTE is a strategic asset to the French state and regulators would not likely sanction a deal for the entire minority interest, a second source briefed on the company’s strategy and a second sector banker said. Ultimately the stake size on offer will rest with the French finance ministry, the banker added.
The asset is unlikely to garner a multiple above 10x EBITDA due to buyers’ cautiousness in a down market, according to the first source, and is more likely to be valued at a multiple of high single digits, the first sector banker said.
RTE saw EBITDA in 2015 of EUR 1.9bn, according to a source close to the company. With EBITDA at these levels, a 25% stake at around between 8x to 10x EBITDA would equate to between EUR 3.8bn and EUR 4.75bn.
The process is likely to offer limited opportunity to the wider market, the first source and second sector banker said.
Any transaction would likely involve state-backed French financial initiations such as Caisse des Depots (CDC), the first, second and a third source briefed on the company’s strategy said, or a similar entity such as CNP Assurances [EPA:CNP], the second source added. French Economy Minister Emmanauel Macron previously tipped CDC as a potential buyer.
If this were the structure of a deal it should be considered more as asset relocation among different state-owned entities rather than a true stake sale situation, a second sector banker said.
Although, at equity levels of around 25% the stake could also interest non-French investors such as Canadian pension funds who prefer sub-30% stakes in infrastructure assets, the first source and sector lawyer said. The questions will be over how close the incoming entity needs to be to the French state, they added. The French government is also close to various Middle Eastern and Asian funds who could be courted to invest, the first sector banker said.
Funds such as OTPP have been actively investing in European infrastructure, and are thought to be forming a consortium with other funds to participate in the process, due to start in May, for a majority stake in National Grid’s (LON:NG) four electricity distribution networks, according to previous Mergermarket reports.
The National Grid process will have a significant bearing on the timeline of any RTE sale, a third sector banker said. With the UK auction to occur in the first half of the year it makes an RTE sale more likely in the second half, as the bidders may be the same, he said.
Yet, it may also have a negative bearing on an RTE process as the French company has far more political risk attached than National Grid, and so could be seen as a less attractive investment, he added.
If EDF does not manage to sell enough assets at the right price in 2016, it will have to consider a rights issue, the second sector banker said. The trigger will be when it sees visibility on the divestments timing and value, he added.
EDF announced a EUR 1.10 per share dividend on 16 February, with the government returning its EUR 1.8bn worth of dividend to the company, which Chairman Jean-Bernard Levy described as “a de facto capital increase,” according to press reports.
The company is undergoing a complete divestment of its Polish non-renewable portfolio in a dual sale process, with the larger process having kicked off in February and valued at around EUR 500m, according to Mergermarket reports.
The company may also look to divest interests in EDF Renewable Energy in the US, Italian oil and gas company Edison and energy services company Dalkia, according to reports.
Still, with the coming French regulation on energy transition it is unlikely to dispose of renewable energy assets, the second sector lawyer said. Additionally, Dalkia is spearheading growth in the energy services sector and EDF spent a lot of time and effort in securing it, a sector banker said, so it is unlikely to want to sell.
EDF did not return requests for comment.
by Patrick Harris, Katie McQue and Francesca Ficai in London, and Arezki Yaiche in Paris