23 August 2018 Corporates European Utilities EuropeanMore Utilities predators than prey as deal-making pushes asset prices higher More predators than prey as deal-making pushes asset prices higher European utilities have splurged on acquisitions after years of retrenchment. More than USD 50bn in deals are likely in 2018. Yet growing competition for assets from Analysts a wider circle of investors may be storing up trouble as valuations rise. Utilities can ill afford to stay out of the game for risk of losing market share despite a Sebastian Zank, CFA natural reluctance to overpay for assets and embark on mergers. +49 30 27891 225 [email protected] The risk appetite of European utilities has grown after several years of i) cleaning up portfolios of generation assets ii) improving balance sheets and iii) cost cutting. The Marlen Shokhitbayev, CFA renewed interest of the utilities’ executives in growth amid growing political pressures +49 30 27891 127 coincides with still low interest rates, ensuring that energy infrastructure assets and their [email protected] promise of stable long-term cash flows are increasingly in demand from a wider selection of other investors: Sovereigns and sub-sovereigns, financial investors and increasingly oil Media & gas companies. Financial investors in particular are steadily increasing their exposure, Matthew Curtin having participated in more than a third of recent executed deals. +33 6 22763078 [email protected] Figure 1: European energy infrastructure circled by different stakeholder groups André Fischer Utilities +49 30 27891 147 [email protected] Financial Related Research Investors From demergers to M&A: E.ON Oil & gas and RWE set to transform European energy European energy sector, infrastructure assets companies Mar 2018 Sovereigns & sub-sovereigns European Utilities: Commodity Source: Scope illustration Rebound – Past the Trough, Nov 2017 The danger is that if utilities do not take up M&A opportunities, fearing that deals might stretch their balance sheets as valuations rise, they risk giving up market share to Rating Methodology: European industry outsiders which could in turn undermine their long-term growth prospects and Utilities, Jan 2018 credit quality. A complicating factor for potential buyers and sellers is growing Rating Methodology – government sensitivity about the strategic importance of energy infrastructure in Europe. Government Related Entities, Deal making in Europe this year illustrates the fast-changing landscape: Jul 2018 • In Germany, state-owned development bank KfW acquired one of two 20% stakes up for sale in electricity transmission company 50Hertz on the instruction of the government in Berlin after the investment had elicited the interest of State Grid Corp. of China. Belgian grid operator Elia acquired the other tranche. • State-linked Chinese investors are competing for other European infrastructure assets: China Three Gorges launched an unsolicited EUR 9bn takeover bid for EDP and China Scope Ratings GmbH Southern Power Grid is buying 25% of Luxemburg grid operator Encevo. Lennéstraße 5 • Germany’s E.ON, which finalised the sale of a 47% stake in Uniper, against its 10785 Berlin management wishes, to Finland’s Fortum, also agreed a complex EUR 20bn asset deal Phone +49 30 27891 0 with RWE, refocusing their respective businesses on regulated grids and electricity Fax +49 30 27891 100 generation through the break-up of Innogy. [email protected] • Oil & gas corporates are testing the waters in electricity with French oil major Total www.scoperatings.com acquiring independent power producer Direct Énergie for EUR 1.4bn and Spain’s Repsol acquiring Viesgo's low-emission assets and retail business for EUR 750m. Bloomberg: SCOP 2 3 August 2018 1/10 European Utilities More predators than prey as deal-making pushes asset prices higher Increasingly diverse stakeholder group for major European utilities1 Figure 2: Major European integrated gas and/or electricity Figure 3: Major European gas and electricity TSOs companies and power generators: Major shareholders (transmission system operators): Major shareholders Sovereigns & sub-sovereigns Financial anchor investors Sovereigns & sub-sovereigns Financial anchor investors Other utilities Oil & gas companies Other utilities Oil & gas companies 0% 25% 50% 75% 100% 0% 25% 50% 75% 100% E.ON Amprion RWE 50Hertz Uniper Transnet BW innogy Open Grid Europe DE EnBW Ontras/VNG DE Rheinenergie Thyssengas MVV Gascade EWE APG AG Pfalzwerke Gas Connect Austria AT Verbund Trans Austria Gasleitung EVN Swissgrid Energie CH Swissgas Wien Energie Elia Salzburg AG BE Fluxys AT Kelag TenneT Tiwag NL Gasunie Transport Services Energie Steiermark National Grid Illwerke SP Transmission UK Energie Burgenland Scottish Hydro Electric Transmission Alpiq EirGrid Axpo IE Gas Networks Ireland CH BKW Terna Repower ITG Elektrabel IT Snam Rete Gas BE Essent Società Gasdotti Italia Nuon GRTgaz NL Eneco TIGF FR British Gas RTE npower Red Electrica de Espana Scottish Power ES Enagás SSE REN Gasodutos UK Drax PT REN Redes Energéticas Nacionais Centrica DESFA Viridian GR ADMIE DCC Statnett IE ESB NO Gassco Enel Svenska Kraftnät Edison SE Swedegas K D IT Hera Energinet.dk A2A Fingrid Dolomiti Energia FI Gasum EDF Augstsprieguma tÏkls Engie LV Conexus Baltic Grid FR Direct Énergie Elering EE Endesa Litgrid Iberdrola LT AB Amber Grid ES Viesgo PSE Operator Gas Natural PL Gaz-System Energias de Portugal Net4Gas EDP Renováveis CZ ČEPS PT Galp Energia Transelektrica RO R G PPC Transgaz Statkraft NEK BG NO Hafslund E-CO Bulgartransgaz Vattenfall FGSZ Naturel Gas Transmission SE Fortum HU MAVIR FI Teollisuuden Voima Fennovoima K D Ørsted Eesti Energia EE Eesti Gaas Latvenergo LV Lietuvos Energija LT Enea PGE PL Tauron ČEZ CZ EPH Electrica Hidroelektrica RO Termoelectrica B G Bulgarian Energy Holding U H MVM Source: Latest company information, Scope Source: Latest company information, Scope 1 In case a major shareholder, i.e. other utility or holding company, is a government-related entity, Scope classifies that shareholder as owned by a sovereign or sub- sovereign; in cases where the utility is jointly owned by two or more entities, all anchor shareholders are displayed; a blank field indicates a large free float of the company’s shares and no significant shareholder. 2 3 August 2018 2/10 European Utilities More predators than prey as deal-making pushes asset prices higher Increasingly crowded waters for utilities investing in Europe Different stakeholder groups The range of deals in the utilities sector in Europe illustrates the powerful new groups of with different interest for stakeholders with an interest in energy infrastructure assets in the region: European utilities assets • Financial investors such as private equity, infrastructure funds and insurers are in search of satisfactory returns after an unusually long period of ultra-low interest rates, while benefiting sometimes from easier funding than corporates. • Sovereigns and sub-sovereigns (governments, federal states, municipalities) can face political pressure to reverse privatisations, reinforce their public-sector mandates, or undertake politically motivated deals as protectionist pressures grow. Moreover, state-owned companies, particularly from China but also the Middle East, are increasingly eyeing European infrastructure assets. • Oil & gas companies are joining the hunt for utility assets. Scope believes that those players are looking for increasing diversification and ‘forward integration’, particularly in light of volatile oil & gas pricing, hence their search for assets which could provide a buffer from potential volatility in the core business or broaden their access to retail rather than industrial customers. These companies are also laying long-term plans for what might replace their core business if and when hydrocarbons start playing a significantly less important role in economic activity. • The incumbent utilities are jostling for position as foreign competitors from outside Europe look to expand their geographic footprint in the region. Scope regards this increasingly diverse stakeholder circle as a feature of infrastructure investing in Europe, with energy assets joining others such a water utilities and airports, which sets it apart from other sectors. Intensified battle for assets Given the intensifying battle over compelling assets, prices are rising, visible in increased displayed by rising valuations stock market valuation multiples for listed utilities, up at new highs, particularly for and accelerated transaction regulated utilities. Utilities stocks (EURO STOXX Utilities) have risen on average by 25% volumes in the past five years based on enterprise value/EBITDA multiples (see Figure 5). Hence, the price premium which needs to be paid on these industry multiples for acquiring follows that pattern, particularly when different stakeholders will be fighting over the acquisition target. Reflecting the landmark transactions in 2018, e.g. Fortum-Uniper, CVC/Grupo Alba-Gas Natural Fenosa, Allianz-Elenia; Elia/KfW-50Hertz, and potential transactions such as China Three Gorges bid for EDP, deal volumes are likely to surpass the USD 50bn mark in 2018 (see Figure 4). Figure 4: Power transactions in Europe - Deal value and Figure 5: EURO STOXX Utilities: Average valuation volume, by segment multiples Generation Transmission&Distribution EV/EBITDA (lhs) Price/Book (rhs) Renew ables Others Deals 60 250 12 3.0 50 200 10 2.5 40 deals 8 2.0 150