Enel S.p.A.; Market Cap: $39.10bn (as of 27/11/2015)
Enel Green Power S.p.A.; Market Cap: $9.96bn (as of 27/11/2015)

Introduction

Under an agreement announced in mid-November, Enel, which owns 69% of Enel Green Power (EGP), plans to reintegrate EGP back into its corporate portfolio. Enel, Italy’s largest utility provider, plans to issues €3.1 billion of shares to repurchase EGP which it sold through an initial public offering in 2010. Enel’s reintegration plans are a sign of its increasing prioritization and investment in renewable energy.

About Enel S.p.A

Enel S.p.A. (ENEL) is a multinational generator and distributor of electricity and gas. It was first established in 1962 as a public body and originally stood for Ente Nazionale per L’Energia Elettrica (National Entity for Electricity). It was converted into a limited company in 1992 and in 1999, after the liberalization of the Italian electricity market, was privatized. As of February 25th, the Italian government still owned 25.5% of the company’s shares.

In 2014 Enel employed approximately 70,000 people in 30 countries. It has 13 listed subsidiaries and roughly two-fifths of its earnings are handed over to minority investors, substantially higher than the 12% average for the European sector. Enel’s highly complicated business structure has prompted executives to look into restructuring of their Latin American operations, which include Endesa Chile, involved in power generation, and Chilectra, the main distributor in the Santiago de Chile area. Enel has $76.9bn in revenues and $660m in net income. The company in 2014 has generated 283.1TWh of electricity (34% from renewables, 29% from coal, 14% from nuclear, 13% from gas combined cycle and 10% from oil and gas turbines) and concentrated most of its capex (in total €6.7bn) in Iberia and LATAM (€2.6bn). As the data clearly reports, Enel has been a leader among large European utilities in investing in renewable energy, with total capex for renewable source generation in 2014 amounting to €1.7bn. Most notably, the company has led the corporate effort for a climate deal in the upcoming Paris talks.

Currently Enel trades at 93x its TTM EPS, way higher compared to peers like GDF SUEZ (8x) and SSE plc (29x), moreover it is one of the very few players in the industry that has positive TTM EPS. Its share price performance in the last twelve months was rather flat, with only a 7% improvement to €4.15 as of Friday. However its performance, compared to Amundi’s ETF MSCI European Utilities, which showed a 100bp decline in the last twelve months, can be viewed as a positive sign and it is mainly driven by the group’s reorganization both in EMEA and LATAM.

 

About Enel Green Power S.p.A

Enel Green Power S.p.A. (EGPW) is an Italian multinational renewable energy corporation headquartered in Rome. EGP was created as a subsidiary of Enel in December 2008 in an effort to group its global renewable energy interests. EGP has operations in over 16 countries across 3 continents (Europe, North America, and South America); however, more than half of its plants are located in Italy. Its assets are primarily focused on wind, solar power, geothermal electricity, hydroelectricity, and biomass sources.  In November 2010, a 30.8% stake in the company was floated on Borsa Italiana and Bolsa de Madrid; raising €2.6 billion. It was the largest IPO in Europe since Iberdrola Renovables in December 2007.

In the first 9 months of 2015 the company added 1,000MW of installed capacity and entered the Indian market, to improve the FY 2014 figures of $2.4bn in revenues and $208m in net income.

Its stock price has been characterized by high volatility in the last twelve months and an uptick in the low single digits, however, if we look at the two months before the deal was announced, EGP’s share price went from €1.60 to the current figure close to €2, an upsurge of around 25%.

 

The deal

Italian utility giant – Enel has decided to acquire the remaining shares of its subsidiary company Enel Green Power (EGP) in order to boost the growth of the entire group. This growth has been envisaged through the increase in investment capability of EGP, the implementation of the target’s best practices to Enel, better integration of renewables and both commercial and financial synergies.

With this deal, Enel is seeking control over the remaining 30% of EGP that it did not own before, and for this strategy it needs to give to target’s shareholders 0.48 of group shares for each EGP share it acquires. Therefore, EGP and its subsidiaries will become the integral part of the entire group. This deal has been dubbed a “partial non-proportional spin-off” of EGP into Enel. As a result, Enel shareholders will become the sole owners of EGP, whose shares will be discontinued.  Moreover, the Italian government’s stake in Enel will consequently drop from 25% to 23.569%.

The spin-off is subject to the approval of the extraordinary shareholder’s meeting of both EGP and Enel that will be organized on January 11th, 2016. Consequently, the deal will be closed by the end of Q1 2016.

The reasons for this deal could be the financial performance of both Enel and EGP. The latter has seen quite good results, and it shows great progress from first and second stage (being government support and cheap funding) into a third stage of growth, thus becoming a fully profitable company that can be a crucial part of Enel group. The growth of its operations since listing has been very significant, as it doubled its capacity from 5.8GW to 10.6GW. Moreover, its EBITDA has showed noticeable growth of 38% from 2010 value. On the other hand, Enel is dragged down by the high amount of debt that it possesses and it could thus see EGP as a further strategy for growth and better positioning. Another reason for which Enel seeks the complete ownership in EGP is the changing of the needs of the customers that are increasingly seeking for integration of renewables and traditional resources. Moreover, Enel has already announced plans for the increase in investments in renewable energy summing to 50% of new capex of the entire group in next four years. Thus, having the entire stake of EGP, it could fully profit from the investments it plans to make.

Market reactions

The market has not been convinced that this deal will create value for shareholders as both Enel and Enel Green Power has seen a decline in the value of their shares subsequent to the announcement (2.5% and 2.6% respectively.) The main reason for this is the fact that the deal was executed thanks to Enel’s majority holding in EGP, which under Italian legislature made it possible to impose its decision over the minority shareholders – and perform this deal.

Advisors

Credit Suisse and J.P. Morgan acted as the financial advisors for Enel, while Enel Green Power for their advisory has hired Barclays and Mediobanca.

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