EDF and Iberdrola Buybacks Suggest Renewables Upturn
The European renewable energy sector has not had a particularly happy time of late. Over the past few years renewable energy production has been battered by the effect of poor wind speeds. It has also been haunted by regulatory uncertainty as cash-strapped governments re-think generous subsidy regimes. Spain, for instance, at the end of last year applied retro-active changes to its pre-existing solar incentives.
A combination of these factors, as well as the poor shape of the global economy, has resulted in the undervaluing of the development pipelines of large renewable companies. For instance, Iberdrola Renovables is trading at just over half its 2008 IPO price, while EDP Renovaveis is at two-thirds of its 2008 share value. All of this would suggest that the renewables sector is seriously in the doldrums.
Not everybody, however, is so pessimistic about the future state of renewables. As the world slowly moves back toward growth, it is likely that governmental support for renewables will return in earnest. Indeed, most developed countries have signed up to binding renewable energy targets, and these are not going to go away.
In addition, renewable energy looks likely to become more popular as the price of conventional energy increases. One renewable energy financing advisor commented: “In the 2013+ scenario, conventional power prices will climb considerably, meaning renewable power will look comparatively cheaper, much cheaper. And, more importantly, tariff regulation will be relieved from a lot of the pressure it suffers now.”
Buyback Of Listed Companies
It comes, therefore, as little surprise that, in the context of this predicted upturn in renewables, energy companies are focusing once again on their clean energy subsidiaries. In March Iberdrola announced that it wanted to buy back control of its renewables subsidiary; this month EDF-Energies Nouvelles announced it planned to do the same.
Iberdola is widely understood to be buying back Iberdola Renovables as the ailing division is perceived to be undervalued. Acquiring the company now with a share value of just over EUR4.40 – a little over half its EUR7.50 2008 IPO price - makes business sense, particularly if you believe an uptick in fortunes for the renewable energy sector is on the horizon.
In buying back its renewables business, EDF-EN is also likely to be motivated by a desire to snag a bargain. Its profit margins, however, are likely not to be particularly sharp as, out of all large utility-linked renewables developers, its share price has performed the best. It listed at just under EUR33.00 at the tail-end of 2006, and its share price now stands at a little over EUR40.
In truth, both EDF and Iberdrola have other reasons for buying back their renewable businesses. For EDF, doing so could also act as a decent hedge against the backlash on nuclear energy in the aftermath of Fukushima (EDF is a specialist in nuclear power). For Iberdrola, incorporating renewable back into its balance sheet could also serve to dilute rival developer ACS’s stake in the business. The latter has made acquiring a board presence at Iberdrola a key objective in recent months.
Nonetheless, the mainstream view is that the developers’ main reason for reuniting with their renewable arms is to make a tidy profit. With the economic recovery “around the corner”, interest rates moving up and stock prices set to grow, their timing to buy back just before the corporate world starts making their 2010 result announcements “looks brilliant”, one advisor to the sector commented.
Trading On The Upturn
Companies such as Iberdrola and EDF are trading on the cycle, according to one Belgian-based corporate financier interviewed by InfraNews. “They put the renewables subsidiaries in the market when they were highly valued, valuations have now gone down, and they see the upside potential in quickly taking them back in.”
These buybacks could potentially lead to some interesting M&A activity in the mid-term as corporates look to realise the value of bringing these companies in house. All utilities are thinking about how to manage their balance sheets and part of that is potentially a sell down on portfolios of assets, or individual assets. “Iberdrola and EDF won’t have the renewables assets on their balance sheet long-term, but they see an opportunity to bring them back in house at competitive valuations,” one M&A advisor told InfraNews.
Further down the scale, in the mid-cap market a similar trend has been emerging. Italian utility ERG announced in January it would be buying back the 18% stake in renewable subsidiary ERG Renew it didn’t already own. The renewables outfit is currently trading below par. It listed at EUR1.60 a share in 2000. Its shares are now valued at EUR0.96.
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