Is there really a strategic logic to this?

11th May '09 by MrT

3 comments 3261 reads

I am a bit sceptical about this latest announcement that Centrica (£CNA) is buying 20% of EDF's nuclear unit, British Energy, for £2.3 billion ( at a 6% discount to that which EDF paid for British Energy) plus selling its 51% stake in the Belgian power generation and supply business SPE, valued at 1.2 billion.

So the chat seems to be that, by investing in BE, Centrica can lessen its dependence on the wholesale gas and electricity markets where prices are volatile. "The EDF deal is an attempt to even out Centrica's earnings stream and create more certainty for shareholders... You should look at it as a hedge against the vagaries of global commodity prices."

But is a 20% minority holding in British Energy really going to make a difference? Why didn't they just agree a long term supply contract with British Energy?There's talk of a JV with EDF to construct, develop and build at least four new reactors but that assume they can get away with doing so given Britain's rampant nimbyism!

The stock is up 6.4% today so clearly the market thinks it's a good idea.... Dunno, must be missing something! Or is it just that the terms are better than those that had already been pre-announced?

http://www.reuters.com/article/rbssIndustryMaterialsUtilitiesNews/idUSLB46970320090511

http://uk.reuters.com/article/businessNews/idUKTRE54A0YB20090511

http://www.guardian.co.uk/business/2009/may/11/nuclear-power-plants-centrica-edf

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emptyend

11th May '09

Heard about the deal yesterday. Basically the strategic rationale is that since British Energy produces the 20% or so baseload they are going to be an important part of the mix in the medium/long term as well as the short term and, by taking a stake, Centrica have more control over the long-term development of the energy mix they utilise. Bear in mind that gas prices are increasingly going to fall under Gazprom's aegis - so if they don't develop a few new nuclear plants we're all buggered!

Gradders73

12th May '09

I think this makes sense. It seems they were sitting on some cash and seems like a good time to buy utility assets with such low interest rates - suspect it was as much to get rid of the Belgian Asset. It does allow them to share in development of nuclear (which will take up much of the increased demand for power), and seems to come with long-term supply contracts, though not sure if this is fixed price or just contracts for delivery with price based on spot, and I suspect preferential treatment when supplies become constrained, as well as reducing cash burden thorugh pre-purchase. If they can reduce price volatility, this should give them competitive advantage if inflation kicks in.

The dark cloud over BE is the uncertainty over the infrastructure. They have old reactors and the costs for decommissioning are hard to ascertain, but it seems that this government and the next are committed to nuclear. I suspect the future energy needs will come from nuclear and also LNG, which is coming on line in a big way, but will be less reliable.

Centrica always struck me as sensible people and consolidation of business in the UK seems like the right direction.

MrT

I agree with the need for nucleur if there's to be a future and I like the idea of counter-cyclical M&A - buy when no-one else is buying - but, with a 20% stake, I suspect that they will get end getting stuffed by EDF - this may be overly suspicious/pessimistic.

Is there really a strategic logic to this?

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MrT

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