Centrica to sell North American business to NRG Energy for $3.63bn

October 2020 | DEALFRONT | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

October 2020 Issue

Centrica Plc has agreed to sell its North American subsidiary Direct Energy for $3.63bn to US integrated power firm NRG Energy.

Completion of the deal is subject to customary closing conditions as well as approval by shareholders of Centrica and the Federal Energy Regulatory Commission (FERC). NRG will pay for the transfer in cash and will not include the debt or cash of Direct Energy in the sale.

The acquisition will double NRG Energy’s customer base across the US and Canadian provinces to more than six million. With this acquisition, NRG aims to diversify its business and enter into states and locales where it does not currently operate.

Centrica plans to use the cash from the sale to reduce net debt and contribute to its pension schemes, with its operations subsequently centred on the UK and Ireland. The company was already in the midst of a wider restructuring before the COVID-19 crisis struck, and those efforts have since gained even greater significance.

In June, Centrica announced plans to cut around 20 percent of its global workforce – approximately 5000 jobs. The group reported a 14 percent drop in half-year operating profit to £343m from £399m a year earlier. This was due to the pandemic which reduced energy use and weakened commodity prices. The company’s earnings before interest, taxes, debt and amortisation (EBITDA) for the first half of the year fell by 19 percent compared with the year before to £869m, leading to a pre-tax loss of £264m.

NRG says the acquisition will give it $740m in raw earnings once completed. In its announcement, a company spokesperson said the deal “provides substantial regional diversity to NRG” and that it will “allow the combined company to reduce costs and leverage shared best practices”.

“The transaction provides Centrica with an opportunity to realise significant value for our shareholders at an attractive valuation,” said Chris O’Shea, group chief executive of Centrica. “This disposal is aligned to our strategy to become a simpler, leaner business and in addition it will materially strengthen our balance sheet and remove a source of earnings volatility from the Group. Combined with our focus on completing our intended exits from Spirit Energy and Nuclear at the appropriate time, this is expected to lead to a more predictable and high-quality earnings stream moving forward.

“Direct Energy is a strong business with a great team. I believe NRG will be an owner who will invest in the business and make it even better. The remaining Company will be an energy services and solutions company, helping customers to transition to a lower carbon future, focused on the UK and Ireland where we have leading market positions. Alongside our recently announced organisational restructure, which puts the customer at the heart of everything we do and accelerates the delivery of targeted cost savings, this transaction is a fundamental step in the turnaround of Centrica and will leave us well placed to deliver for both customers and shareholders.”

“This combination improves NRG’s status as one of North America’s premier integrated power companies, bringing the power of energy to people and organisations through our diverse generation platform and leading retail brands,” said Mauricio Gutierrez, president and chief executive of NRG. “The acquisition aligns with our broader strategy of perfecting our integrated business model and drives significant value creation for our customers and stakeholders. Direct Energy’s complementary assets, talented team and excellent customer service make it a natural fit for our portfolio, and we look forward to welcoming Direct Energy to the NRG team.”

Centrica acquired Direct Energy in 2000 for $912m, giving the company its first presence in North America. Having previously operated mainly in Texas, the deal will make the company a more prominent player in the eastern US in particular.

Richard Summerfield