By Fred Pals and Lars Paulsson
Feb. 23 (Bloomberg) -- Vattenfall AB, the Nordic region’s largest utility, agreed to pay 8.5 billion euros ($10.9 billion) for Dutch utility Nuon NV’s production and supply unit to expand in neighboring markets and boost renewable-energy output.
State-owned Vattenfall will buy 49 percent of the business initially and the rest over six years on fixed terms, the Stockholm-based company said today in a statement. The cash transaction excludes Nuon’s grid operations. After 2008 dividends, the cost will be 10.3 billion euros, the companies said.
Vattenfall has sought to enter the Dutch energy market, where electricity prices are among the highest in northwest Europe, since 2005, after acquiring German and Danish power plants. Amsterdam-based Nuon is the Netherlands’ second utility to divest part of its production and supply business after Arnhem-based Essent NV last month agreed to sell units to Germany’s RWE AG for 9.3 billion euros.
“It makes sense geographically and strategically but at first sight it seems a little bit expensive,” Andrew Moulder, a senior analyst at Creditsights Inc., said today by telephone. The deal values the unit, including debt, at 14 times 2008 operating profit, while European utilities are trading on average only six times higher, he said.
Wind Investment
Vattenfall will become Europe’s biggest offshore-wind operator after the acquisition and remain the fifth-largest electricity producer, Chief Executive Officer Lars Josefsson said today on a conference call. Nuon and Vattenfall will jointly develop carbon-capture and storage projects at Schwarze Pumpe in Germany and Buggenum in the Netherlands, and invest in wind and tidal power, according to the statement.
“Nuon’s widely respected knowledge in renewables and clean- energy technologies is a very valuable addition to our own,” Josefsson said. “It will accelerate the realization of Vattenfall’s strategy to make electricity clean,” he said, adding that no workers will be fired as a result of the tie-up.
The four biggest Dutch utilities are required by law to separate production, trading and sales divisions from grid operations by Jan. 1, 2011, as the European Union seeks to promote competition and spur grid investment. Nuon said last year it was looking for a foreign partner, after the failure of merger talks with Essent. Its board today recommended Vattenfall’s offer to shareholders and the transaction may close by the end of the second quarter, according to the statement.
Deal Financing
The Nordic utility got a 5 billion-euro committed debt facility from nine banks to buy the Nuon stake, Vattenfall said in a separate statement. The purchase won’t jeopardize the company’s A credit ratings, Creditsights’ Moulder said.
European utilities have bucked a trend for fewer mergers and acquisitions as changes in EU law provide incentives for combining. Cost-cutting, diversification and declining stocks have made targets cheaper. The pace of mergers and takeovers fell 39 percent to $2.48 trillion last year as a credit squeeze hampered financing, according to data compiled by Bloomberg.
Vattenfall has said it plans to sell its German high-voltage power grid, and the Nuon purchase may “push them more toward a sale” to raise funds, Moulder said.
Vattenfall gained a foothold in the German market in 2000 by purchasing Hamburg’s HEW utility and Berlin’s Bewag. It then took control of power producer Veag and miner Laubag. Vattenfall purchased the four companies for 7 billion euros, including 3.7 billion euros in assumed debt.
Dong Swap
The Swedish utility expanded into Denmark in 2005, when it bought 2,400 megawatts of power capacity in a swap deal with Dong Energy A/S.
The company will now turn its attention to the U.K., Moulder said. Vattenfall views Britain, Europe’s third-biggest power consumer, as a priority market, where it bought wind-energy assets in the second half of last year. Even so, the Nuon agreement “rules out buying Scottish & Southern,” Moulder said.
The Financial Times reported last month that Vattenfall may consider bidding for the U.K.’s Scottish & Southern Energy Plc, citing unidentified people.
Vattenfall will be “looking at wind” in Britain and may bid for any new nuclear sites that Electricite de France puts up for sale, Moulder said.
“The purchase gives Vattenfall a broader production portfolio and greater competence within gas and renewable-energy production,” Swedish Industry Minister Maud Olofsson said in an e-mailed statement. “Vattenfall plans to significantly reduce carbon dioxide emissions from Nuon’s existing production to 2020, by for example switching fossil fuels for biofuels while at the same time investing in other renewable production.”
Nuon, which has about 10,000 employees, said Feb. 16 that fourth-quarter profit fell 62 percent as production declined and operating expenses increased. Net income dropped to 79 million euros from 210 million euros a year earlier. Sales sank to 1.62 billion euros from 1.78 billion euros.
To contact the reporters on this story: Fred Pals in Amsterdam on fpals@bloomberg.net; Lars Paulsson in London at lpaulsson@bloomberg.net
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