When some of Europe’s largest utilities started selling off stakes in their renewable energy units in 2008, it was seen as a sign that the industry was beginning to come of age.
What to make, then, of the news earlier this year that two of the most high profile spin-offs, Spain’s Iberdrola Renovables (also known as Iberenova) and the French group EDF Nouvelles Energies, were set to be bought back by their parent companies?
Iberdrola announced it would pay €3.08 ($4.36) per share plus a special dividend for the 20 per cent of the company it sold off, representing a 20.7 per cent premium to its average price over the past six months, while EDF offered investors €40 in cash or a share swap for the 50 per cent that it does not own.
Analysts say the deals are a vote of confidence in the sector but they also reflect the changing fundamentals for renewable energy companies over the past five years. “When these companies floated in 2007 and 2008, the market could not get enough of renewable energy companies,” says Ronan O’Regan, director of the renewables and low carbon group at PwC.
Both the market and the companies themselves assigned too much value to project pipelines during this period, says Mike McNamara, head of new energy and clean technology research at Matrix. “There has been a complete rejection of that and it has probably gone too far the other way.”
The financial crisis and a lack of liquidity, combined with large cuts in capital expenditure and lower power prices in the US, have led to a disappointing evolution of the renewable energy sector over the past few years, says Raimundo Fernandez-Cuesta, utilities analyst at Nomura. “When the market turned, what was thought to be a quasi-regulated activity with limited downside turned out not to be – partly because of high gearing among developers and partly because lower power prices reduced the incentive for utilities to enter into power purchase agreements.”
Mr Fernandez-Cuesta says the long-term outlook for Iberdrola Renovables and the sector is “very promising”, and may have been further boosted by the nuclear accident in Japan and the high oil price caused by events in the Middle East. “But performance has been disappointing relative to the high expectations when the company came to market.”
It has been difficult to grow the bottom line, he adds. While ebitda performance (earnings before interest, taxes, depreciation and amortisation) has been relatively strong as a result of capacity additions, interest and depreciation charges have eaten into earnings and there has been pressure on companies to take action to increase returns to shareholders. Having valued development pipelines too highly, “the market is now not willing to pay for growth. No-one cares about pipelines and big re-ratings in the sector are not likely any time soon.”
Before the credit crunch, investors were prepared to pay a premium to access consented wind sites, agrees Mr O’Regan, because they knew there was plenty of finance available. “Now, reaching the consenting stage does not create such value because the money to develop the sites may not be there.”
This discount on valuations makes the assets look cheap to their parent companies.
There have been grumbles that the moves short-change minority shareholders, especially in the case of Iberenova as the company had talked down its near-term prospects before the offer was launched.
“This transaction illustrates much of what is wrong in the capital markets today,” said David Blood, senior partner at Generation Investment Management, the largest minority holder of Renovables with a 1.3 per cent stake when the deal was announced. “It is short-term, supported by selective data, full of potential conflicts of interest, and devoid of shareholder engagement.”
EDF’s offer, at a 10 per cent premium to the share price at the time of the offer, looks like better value for shareholders, according to Simon Gottelier, investment manager at Impax Asset Management. It has been suggested the offer was a response to the Fukushima nuclear accident in Japan, but Impax believes it is more about bringing expertise back in-house in advance of the launch of a round of tenders for French offshore wind projects.
Of the other likely candidates for similar deals, Enel Green Power has only recently been spun out – at the lower end of its price range – and EDP, the Portuguese utility that floated a quarter of its clean energy unit, EDP Renováveis, in 2008, would probably struggle to fund any deal – not least because EDPR’s shares have been boosted by its rivals’ deals.
Even though plenty of other utilities have renewable assets in their portfolios, the buy-backs may make them think twice about spinning off their own renewables arms, certainly until valuations recover.