23 May 14 – EDP [Euronext:EDP], the Portuguese energy company, has been tipped by sector bankers as the front-runner to buy E.On’s [FWB:EOAN] Spanish electricity generation and distribution businesses.
If the German company decides to exit Spain, a deal with EDP would make industrial sense, a first banker said. “You don’t have to be a genius to bet on EDP,” the banker added.
EDP is the fifth-largest player in the Spanish energy market. It had a market share of 6.0% of generation in 2012, while E.On had 3.0%. A deal between the two would catapult the merged entity into fourth position. The market leaders are Iberdrola [MCE:IBE], Endesa [MCE:ELE] and Gas Natural Fenosa [MCE:GAS].
The main stumbling block to a deal would be financing, the first banker said, adding that EDP has little capacity to raise more debt. The company had net debt of EUR 17.1bn on its balance sheet at the end of March.
Although EDP has enough liquidity to cover its business through 2015, it would be reluctant to worsen its position, the banker said. The potential bidder is also reluctant to allocate more resources to Spain due to current conditions in the market, a person familiar with the company’s thinking added.
E.On’s business might be too big for EDP or any one player to swallow, a second banker said. A break-up into lots might make sense, the banker suggested.
The Portuguese company would be particularly interested in E.On’s distribution assets that are close to its HC Energia business (formerly known as Hidrocantabrico) in Northern Spain, said a third banker.
Sale draws closer
E.On is thought to be moving closer to a sale of its Spanish business. “The info memorandum is being drawn up,” said a fourth banker, adding that E.On is looking at selling a number of other assets, as well as Spain.
Citi is understood to be working with E.On. The process is likely to begin in June, with first-round bids planned for July, the third banker said. E.On still needs to take a formal decision on whether or not to proceed, said the first banker, adding that buyers are beginning to study the opportunity in very general terms.
E.On intends to sell its Spanish business in a bid to refocus its efforts on emerging markets such as Brazil, and pull out of the weaker economies of southern Europe, the bankers said. With its balance sheet blighted by weak EU power prices, the German firm reported a net debt of EUR 32bn in April. The company has generating capacity of 4,600 MW and serves 650,000 clients in the north of the country.
The German company’s Spanish business could have a value of around EUR 1bn, according to a sector analyst. However, it is very difficult to value the business without full clarity about the government’s plans for the sector, said a fifth banker. “Personally, I wouldn’t advise E.On to sell Spain yet,” the fifth banker said.
The government is slashing renewable energy subsidies and reforming different segments of the market in order to get to grips with an electricity tariff deficit, caused by a shortfall between retail power prices and escalating costs. The deficit reached EUR 26bn by the end of 2013 and has been stressing the balance sheets of players in the sector, as reported.
Although the main thrust of the energy reforms was announced last year, many details need to be finalised. The main elements that need to be announced are confirmation of the reform of the renewable market, the details of the distribution and conventional generating reforms and changes to the market in the Canary and Balearic Islands, the first banker said.
All these elements were put on ice ahead of Sunday’s European elections, the fbanker said. The next round of announcements is likely in June or July, with the new laws coming into effect in September or October “at the very earliest,” the first banker continued.
The timeline on the reforms and the subsequent round of M&A is still unclear, said a lawyer who is studying the issue. The government is likely to announce the missing elements of the reform before August, the lawyer added.
E.On is highly unlikely to take any decisions before the results of the reforms are fully delivered, said a sixth banker. There is always a risk that the details of the new regulations will change between the last public draft and the law, the banker said, adding that publication of the law will pull the trigger on a huge round of consolidation in the sector as a whole.
One of the key elements in the proposals is to cut EUR 1.7bn from renewable subsidies, with the wind sector tariffs taking a EUR 600m hit.
Infrastructure funds likely to show interest
If EDP decides not to take part in the sale, all eyes will be on infrastructure funds, which have been actively buying distribution assets in Spain in recent years. Most of these funds would be interested in packets, but not the whole business, the second banker said.
Although this is true of most infrastructure funds, a small minority might be interested in the whole business, the first banker said, adding that this would help them build a strong competitive position. E.On would prefer to sell the business in one deal, said the sixth banker.
In the event of a break up, two or three lots would make sense, said the second banker. Breaking the business into generating and distribution units would be useful, an industry source said.
Another way of splitting the business would be to sell the wind-power plants first, said a seventh banker. The broad terms of the renewable reforms are known, while conventional generating valuations are still uncertain due to lack of clarity on prices in the electricity pool, the banker said.
If the company decided to sell its wind power first, market leader Iberdrola might be a likely candidate, a second industry source said. However, the company would probably only be interested if it were offered the assets at fire-sale prices since it is focusing on consolidating its international presence and paying down debt, said a person familiar with the company’s thinking.
E.On’s Spanish generation portfolio comprises coal-fired power plants, combined-cycle gas turbine power plants (CCGT), hydroelectricity and a wind farm fleet. Its CCGT plants are Escatrón (800MW), Tarragona (410MW), Bahia de Algeciras (800MW), and Solvay, which is still in the licensing phase. Its coal plants are Puento Nuevo (324MW), Puertollano (221MW), Los Barrios (567MW) and Escucha (160MW). Its hydroelectric assets are the Aguayo-Aguilar Plant Group (389MW) and Navia Plant Group (202MW).
E.On’s Spanish wind power fleet, which is all onshore and totals 457.5MW of installed capacity, consists of Pax (19MW), Sierra de Tineo (44MW), Pico Gallo (24MW), Bodenaya (18MW), Alto do Folgorosa (8MW), Joguinho (12MW), Espinhaco de Cao (10MW), Barao de Sao Joao (45MW), La Victoria (24MW), Ascoy (1.5MW), Carcelen (12MW), Matabuey (16MW), Mingorrubio (26MW), Aragon (133MW), Hiperion II (50MW), Paramo de Poze (15MW).
On the distribution side of the business, E.On has 33,000 km of pipelines serving 650,000 customers. The company is present in four autonomous communities: Cantabria, Asturias, Castilla & Leon and Galicia.
A spokesperson for EDP was not available to comment. E.On, Citigroup and Iberdrola declined to comment.
by Katie McQue and Rupert Cocke, with additional reporting by Nelson Rodrigues and Iñaki Miguel