EDF sells 20% of British Energy to Centrica

By Peggy Hollinger in Paris and Ed Crooks in London
Published: May 10 2009 19:36

EDF on Monday announced the sale of a 20 per cent stake in British Energy to Centrica of the UK, in a deal that would value the French group’s recently acquired nuclear operator at close to 6 per cent less than the £12.4bn it paid last year.
Centrica will pay £2.3bn ($3bn) for a smaller stake in British Energy than expected. It had agreed to take a stake of up to 25 per cent, but came under fire from some shareholders concerned that it could be over-paying.

Electricity prices have plunged since last summer, hitting British Energy’s profits.
The UK gas group will pay about half in cash. The balance will be accounted for with the transfer of Centrica’s 51 per cent stake in SPE, Belgium’s second-largest power producer, to EDF.
Centrica and EDF had been struggling to conclude a deal for several months amid strong disagreements over valuation.
Last summer the two sides announced a non-binding agreement whereby Centrica would buy 25 per cent of British Energy for £3.1bn, putting the same valuation on British Energy as was paid by EDF.
But the sharp fall in energy prices since then has called into doubt future earnings for British Energy and raised doubts among Centrica shareholders about the wisdom of a deal at that price.
Neil Woodford, head of investment at Invesco Perpetual, which is a significant investor in both Centrica and British Energy, said on Monday: “Centrica has negotiated a good price for the deal package which will create a more vertically integrated and more balanced business in an environment of volatile international energy prices.”
Sam Laidlaw, Centrica’s chief executive, said the deal with EDF had been agreed on “very different terms” from the memorandum of understanding signed last summer.
Centrica is paying only £1.1bn of the price in cash, leaving it with sufficient financial firepower for other deals, including a possible bid for Venture Production, the North Sea oil and gas producer in which it has a 23.6 per cent stake. The group last year raised raised £2.2bn in a rights issue, and buying Venture would cost it about £1.3bn.
Centrica was intent on pursuing the British Energy deal as part of its strategy of increasing its electricity and gas production to reduce its exposure to prices in wholesale energy markets.
The deal marks Centrica's debut in the nuclear market, to offset stagnant demand and falling gas production at home. It takes the proportion of the company’s gas and electricity needs that it produces itself from 35 to 45 per cent.
Mr Laidlaw said his target was to increase it further to 50-55 per cent, in line with Centrica’s competitors, although that could also include long-term gas contracts.
Some investors were supportive of that strategy, but concerned that Centrica did not pay too much to pursue it.
The final price agreed with EDF should ease those fears. The notional valuation of £2.3bn represents a 6 per cent discount to the price paid by EDF, according to Centrica.
However, that is made up of just £1.1bn in cash and a £1.2bn value put on Centrica’s 51 per cent stake in SPE. That valuation represents a multiple of 14 times the Belgian utility’s earnings before interest, tax, depreciation and amortisation – well above those paid in similar deals in the sector. Centrica paid just €585m for 25.5 per cent of SPE last summer, when energy prices were at their peak.
Shares in Centrica gained 5.8 per cent to 240¾p in afternoon London trading, while in Paris EDF was 5.7 per cent lower at €34.37.
EDF is coming under strong pressure to cut its debt, already close to record highs after buying British Energy and 50 per cent of the nuclear assets of its US partner Constellation Energy for $4.5bn.
The group faces a substantial investment programme both in France and abroad. The costs of its new generation EPR reactor has skyrocketed and the nuclear revival has opened markets more quickly than expected.
EDF had said it would not accept less than what it paid for British Energy at 765p a share.
But the deal puts a value of just over 700p a share on British Energy, including a £1.2bn valuation for the SPE stake, which does not appear to have been affected by falling energy prices.
The lower-than-expected price will raise pressure on EDF to accelerate disposals to cut debt, which is set this year to increase significantly beyond last year’s €25bn ($33.5bn).
EDF has said it will sell about €5bn of assets to reduce borrowing and, as reported in the Financial Times last week, is considering whether to pull out of the regulated distribution business in Britain.
Centrica said in a trading statement on Monday that it expected post-tax profits for 2009 to be higher than in 2008, although it reported a sharp drop in production from its gas fields.
It welcomed the British government’s plans to compel energy suppliers to fit every household in the country with a “smart meter”, an intelligent device that monitors electricity and gas use minute by minute, and can send and receive information.
Copyright The Financial Times Limited 2009