EDP sells hydro plants in $2.4bn deal

March 2020 | DEALFRONT | MERGERS & ACQUISITIONS

Financier Worldwide Magazine

March 2020 Issue

Energias de Portugal SA (EDP), Portugal’s largest utility company, has agreed to sell six hydro power plants in the Douro river basin to a consortium led by France’s Engie SA for $2.4bn.

EDP expects the deal to be completed by the second half of 2020, subject to customary closing and antitrust conditions. The consortium includes Engie SA, which holds a 40 percent stake and Credit Agricole Assurances and Mirova-Natixis Group, via managed funds, which hold 35 percent and 25 percent stakes respectively.

The deal, which was led by Morgan Stanley and UBS, will see the consortium acquire the second largest hydroelectric portfolio in Portugal, a deal which complements Engie SA and its partners’ stated plan to invest further in renewable energy projects and energy transition. ENGIE SA said the acquisition will have a net debt impact of €650m.

For EDP, the sale of the assets is part of the company’s ongoing attempt to reduce its exposure to the Iberian market amid political and regulatory headwinds. By the end of 2018, the company had sold €3.2bn worth of assets in the region. The most significant single disposal was its 2017 sale of Spanish gas distribution operator Naturgas Energia Distribucion, SAU to a consortium of institutional investors. Despite these divestitures, EDP still owns more than 7 GW of hydro capacity and provides 90 percent of electricity generation and distribution in Portugal.

Going forward, EDP plans to spend €4bn via an asset rotation programme until 2022. The company has also announced its intention to spend around €12bn between 2019 and 2022 to fund its expansion into renewable energy.

“This transaction aims to optimise our portfolio, decreasing our exposure to concentrated hydro volatility and merchant prices, reinforcing the low business risk profile and improving financial leverage,” said EDP in a statement announcing the deal.

“This transaction accelerates the implementation of Engie SA’s strategy of being the leader in the zero-carbon transition, by placing more emphasis on supplying our customers 100 percent renewable energy adapted to their needs,” said Isabelle Kocher, managing director of Engie SA. “Our objective to add 9 GW of renewable energy over the period 2019 - 2021 is confirmed and this acquisition is added to it.”

EDP reported increased net profits of €405m for the first half of 2019. However, its Portuguese unit suffered a net loss of €18m, largely due to a 50 percent year-over-year fall in hydro production in Iberia. The divested unit contributed €154m to EDP’s earnings before interest, tax, depreciation and amortisation (EBITDA).

The company put its Portuguese hydro assets up for sale in the first half of 2019 and attracted “strong market interest from a large number of potential investors” according to António Mexia, chief executive of EDP on a 26 July earnings call. A number of potential buyers emerged, including Engie SA, Brookfield Asset Management, Macquarie Group and Iberdrola SA, among others.

The reorganisation of EDP has been ongoing for some time and follows a tumultuous period for the company. EDP, Portugal’s largest listed company, has been under pressure to reduce its debt load since becoming a takeover target and attracting an activist shareholder in 2018. The activist investor, Elliott, which holds a 2.9 percent stake in EDP, launched an alternative plan for the utility to divest assets across Brazil, Portugal and Spain last year. In April 2019, the company’s shareholders rebuffed a €9bn takeover offer from Chinese power giant China Three Gorges (CTG), which owns a 23 percent stake in the firm.

2019 also saw EDP Renováveis SA, EDP’s renewables business, agree to fully exit a 997 MW collection of wind assets in France, Spain, Portugal and Belgium, selling its stake to a group of investors advised by JP Morgan Asset Management.

Richard Summerfield