Sunday, November 3, 2024

‘A highly positive valuation’ – £4.2bn ENW auction boosts UK utilities market

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Iberdrola last Friday emerged as the winner of a competitive auction process that will see the Spanish utility acquire 88 percent of the shares in UK distribution network operator (DNO) Electricity North West (ENW). The sellers are a group of UK, Japanese and Chinese investors in a deal valued at £4.2 billion ($5.5 billion; €5 billion) including debt.

The move was the result of an auction launched by Jefferies in March on behalf of the selling shareholders following an October 2023 strategic review into the future of ENW.

The sellers are split into three groups:

  • Equitix (though its Equitix Fund V) – 40 percent
  • A Japanese consortium of Kansai, Daiwa and Mitsubishi UFJ Lease & Finance (the KDM consortium) – 40 percent
  • Chinese investor CNIC – 20 percent

The shareholders are selling their entire stakes in the asset, with the exception of KDM, which will retain a 12 percent stake in ENW and dispose of the other 28 percent to Iberdrola.

The deal has been structured via a purchase of shares through which Iberdrola will acquire 85.6 percent of ENW for £1.7 billion, followed by a £400 million capital increase to acquire an additional 2.4 percent in the asset.

The buyer put the asset’s pre-capital increase equity value at £2 billion and net debt at £2.2 billion for a percent enterprise value of £4.2 billion.

The transaction gives ENW an implied EV/regulatory asset value at March 2025 of 1.44x, according to a filing by Iberdrola with the National Securities Market Commission. EBITDA is billed as £400 million, according to the same filing.

Comprising 12,800km of overhead lines and 47,300km of underground lines, ENW covers rural Cumbria to Greater Manchester, and represents roughly 9.2 percent of Britain’s electricity distribution and consumer base.

Equitix, KDM and CNIC acquired ENW in 2019 from First State Investments Fund Management’s First State European Diversified Infrastructure Fund FCP-SIF and JPMorgan Infrastructure Investments Fund.

That deal took the form of two acquisitions of 50 percent, which had a combined equity value of £1.82 billion.

Iberdrola’s acquisition is expected to close in September or October, according to two sources.

‘The exception rather than the norm’

The details of the sale process do seem to put paid to one market naysayer’s remark some weeks ago that the sale of ENW would likely be hampered by the ongoing Thames Water fiasco, as investors sought to swerve potentially problematic UK utilities as all cost.

However, this deal appears to belie those fears.

One source with visibility on the sale noted: “In this market, to have so many bidders is pretty good. I know of similar transactions where investment bankers are struggling to pull together two bidders for non-binding bids, and those are less interesting assets.”

Another commented that such auctions are now “the exception rather than the norm”, adding “it’s not that auction processes are not attempted, it’s just that over recent years, it has proven difficult to generate sufficient levels of buyer interest and enthusiasm to run a process whereby transaction documents are heavily negotiated during the bidding process and signing follows very quickly after binding offers have been received”.

ENW drew interest from a healthy number of bidders, with CDPQ and French giant Engie initially eyeing the asset separately, but then teaming up at the binding bid stage.

BNP Paribas was financial adviser to Iberdrola on its bid while Clifford Chance provided legal advice.

TAQA, the Abu Dhabi National Power Company, was also in the running, submitting a binding bid.

A consortium of KKR and Dutch pension fund manager APG did not submit a binding bid as KKR pulled out earlier in the process, leaving APG without the necessary capital.

Sources described the auction as “tight”, with binding bids submitted between 24 and 26 July and best and final offers received the week starting 29 July. The deal with Iberdrola was then signed in short order on 2 August.

The sellers were advised by Ashurst.

Muddy waters

Sources have also been bullish on valuation, with some indicating ENW’s saving grace has been its differentiation from the beleaguered water sector.

Said one: “There has been incredible interest down to this being viewed as an energy transition play rather than a utilities play. If you were trying to sell Yorkshire Water right now, you might struggle.”

Another explained: “This is a highly positive valuation. EV multiple to March 2024 and RAB of roughly 1.63x is broadly in line with the multiple achieved in the 2021 [acquisition by National Grid] of WPD, and therefore matches the highest multiple ever observed for a UK DNO. This follows a multiple of roughly 2x RAB observed in the 2022 SSE Transmission deal.”

On the perceived negative association of UK utilities generally with Thames Water, that source concluded: “There is certainly an issue with water and Ofwat, but in electricity there is still a lot of interest. There is still significant interest in UK Plc and regulated utilities. Some investors may have been put off but there are still a lot that haven’t.”

Nathalie Tidman is the Editor of Infrastructure Investor Deals, a news-driven, transaction-focused PEI Group publication that delivers details on private capital-led infrastructure transactions. It is set to launch in Q4.

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