Power grids’ low-wattage resources may spark M&A

Elia SA

13/08/2024 11:19

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are her own.)
    By Yawen Chen
       LONDON, Aug 13 (Reuters Breakingviews) - Europe’s ageing
power grids are flipping the switch on their spending. The needs
of electric cars, artificial intelligence and renewable energy
demand higher investments. Many will struggle to raise funds,
forcing them to sell assets. That might spark a wave of M&A.
    The Old Continent’s electricity demand has been falling for
decades but may be about to pick up again. Goldman Sachs
analysts estimate electricity consumption in the European Union
and the UK combined will grow at an average of 3.6% a year until
2033. That, in turn, means the region’s power operators will
need some 800 billion euros ($874 billion) to upgrade their
infrastructure over that period.
    Utilities are already responding. John Pettigrew, CEO of the
UK’s National Grid  NG.L , plans to invest 60 billion pounds
($76 billion) by 2029, nearly double the level of the past five
years. Peers such as Britain’s SSE  SSE.L , Germany’s E.ON
 EONGn.DE  and Belgium’s Elia  ELI.BR  have all pencilled in
higher investments this year.
    But that will strain already-stretched balance sheets.
National Grid has 43 billion pounds of net debt, nearly 6 times
its estimated EBITDA for the fiscal year ending March 2025 per
LSEG forecasts. Elia, which plans to invest 30 billion euros in
Germany and Belgium through 2028, has a similar level of
indebtedness.
    If raising more debt looks challenging, selling equity won’t
be easy either. When National Grid launched a 7 billion pound
rights issue in May, it priced the shares at a 35% discount, and
its market value plummeted by nearly a fifth.
    Shareholders may prefer asset sales, just as National Grid
did when it sold its gas transmission networks to Macquarie, or
tapping deep-pocketed private equity infrastructure funds for
renewable grids joint ventures.
    RWE  RWEG.DE , for example, is exploring options for its 25%
stake in Amprion, one of Germany’s main power transmission
networks operators. The Netherlands is also trying to offload
the German arm of state-owned electric grid operator TenneT
after the Berlin government failed to buy it in June.
    The industry’s latest big deal suggests sellers can fetch a
decent premium. This month, Spain’s Iberdrola  IBE.MC  bought
88% of the UK’s Electricity North West, valuing the grid
operator at 4.2 billion pounds including net debt. The price
implies a 53% premium on ENW’s current regulated assets, per
Bernstein analysts – slightly lower than what National Grid paid
for Western Power Distribution in 2021. It could be a good
benchmark for more M&A to follow.
    Follow @ywchen1 on X
    
    CONTEXT NEWS
    Britain’s energy regulator Ofgem on Aug. 13 approved the 3.4
billion pound ($4.35 billion) 2-gigawatt electricity
“Superhighway” from Scotland to Yorkshire.
    The approval for the biggest single investment for the
electricity transmission infrastructure in Britain comes as part
of the regulator’s scheme to get new offshore wind energy to the
market and deliver it quickly.
    Iberdrola said on Aug. 2 it would buy 88% of British power
network Electricity North West in a deal valuing the company at
4.2 billion pounds.

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Graphic: Europe has the oldest power grids in the world    https://reut.rs/4eyapgO
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 (Editing by Francesco Guerrera and Oliver Taslic)
 ((For previous columns by the author, Reuters customers can
click on  CHEN/ 
yawen.chen@thomsonreuters.com))