European Event-Driven Analyst

Jesus Rodriguez Aguilar

Event-Driven

<ul>
<li>The New Mexico Public Regulatory Commission voted unanimously in favor of rejecting the acquisition of <a href="https://www.smartkarma.com/entities/pnm-resources-inc" target="_blank" data-smartkarma-citation="entities:16546:1" rel="noopener">PNM Resources (PNM US)</a> by <a href="https://www.smartkarma.com/entities/avangrid-inc" target="_blank" data-smartkarma-citation="entities:26503:1" rel="noopener">Avangrid Inc (AGR US)</a>, a subsidiary of <a href="https://www.smartkarma.com/entities/iberdrola-sa" target="_blank" data-smartkarma-citation="entities:21276:1" rel="noopener">Iberdrola SA (IBE SM)</a>.</li>
<li>Iberdrola could appeal to the New Mexico Supreme Court, although this process could take a long time or work towards obtaining approval from the PRC.</li>
<li>The operation enters an uncertain situation, with a very high probability that it will finally not materialise. Median implied valuation of PNM Resources (comparables EV/Fwd EBITDA based) is $50.14/share. Expect short-term share price weakness.</li>
</ul>


The New Mexico Public Regulatory Commission voted unanimously in favor of rejecting the acquisition of PNM Resources (PNM US) by Avangrid Inc (AGR US), a subsidiary of Iberdrola SA (IBE SM).
Iberdrola could appeal to the New Mexico Supreme Court, although this process could take a long time or work towards obtaining approval from the PRC.
The operation enters an uncertain situation, with a very high probability that it will finally not materialise. Median implied valuation of PNM Resources (comparables EV/Fwd EBITDA based) is $50.14/share. Expect short-term share price weakness.


Iberdrola/PNM Resources: PRC Vetoes the Purchase of PNM

<ul>
<li>
Deals in the regulated power industry have longer closing times (and higher spreads) than those of other sectors.  On 2 November, Ashley Schannauer, the hearing examiner for the New Mexico Public Regulation Commission in charge of the merger application, recommended against the proposed $4.3 billion merger between <a href="https://www.smartkarma.com/entities/avangrid-inc" target="_blank" data-smartkarma-citation="entities:26503:1" rel="noopener">Avangrid Inc (AGR US)</a>, an affiliate of <a href="https://www.smartkarma.com/entities/iberdrola-sa" target="_blank" data-smartkarma-citation="entities:21276:1" rel="noopener">Iberdrola SA (IBE SM)</a>, and <a href="https://www.smartkarma.com/entities/pnm-resources-inc" target="_blank" data-smartkarma-citation="entities:16546:1" rel="noopener">PNM Resources (PNM US)</a>, saying its potential harms outweigh benefits to the public. Investors are getting nervous on the stumbling block of Mr. Schannauer's 447-page report.
</li>
<li>
Parties have until 12 November to file responses to the hearing examiner's report, after which commissioners could hold a hearing or vote on the proposal. If the merger is rejected by the commission, the company could submit a revised proposal. Also, the commission’s decision can be appealed to the New Mexico Supreme Court.
</li>
<li>
The median implied valuation of PNM Resources (comparables EV/Fwd EBITDA based, source Capital IQ consensus) is $50.14/share.
</li>
<li>
The main hurdle to completing this deal is New Mexico regulatory approval. Nevertheless, my understanding, after conversations with Iberdrola's IR and considering the stance of Public Regulation Commission staff, is that the deal should complete, although it may take longer than the initial "October to December 2021" deadline. My TP for PNM is $50.3/share. Investors have made some money on this deal, several times (as can be seen in the chart in the insight). Gross spread as of 3 November is 5.3%. Recommendation is long PNM US, underpinned by stand-alone comparables-based valuation.
</li>
</ul>



Deals in the regulated power industry have longer closing times (and higher spreads) than those of other sectors.  On 2 November, Ashley Schannauer, the hearing examiner for the New Mexico Public Regulation Commission in charge of the merger application, recommended against the proposed $4.3 billion merger between Avangrid Inc (AGR US), an affiliate of Iberdrola SA (IBE SM), and PNM Resources (PNM US), saying its potential harms outweigh benefits to the public. Investors are getting nervous on the stumbling block of Mr. Schannauer's 447-page report.


Parties have until 12 November to file responses to the hearing examiner's report, after which commissioners could hold a hearing or vote on the proposal. If the merger is rejected by the commission, the company could submit a revised proposal. Also, the commission’s decision can be appealed to the New Mexico Supreme Court.


The median implied valuation of PNM Resources (comparables EV/Fwd EBITDA based, source Capital IQ consensus) is $50.14/share.


The main hurdle to completing this deal is New Mexico regulatory approval. Nevertheless, my understanding, after conversations with Iberdrola's IR and considering the stance of Public Regulation Commission staff, is that the deal should complete, although it may take longer than the initial "October to December 2021" deadline. My TP for PNM is $50.3/share. Investors have made some money on this deal, several times (as can be seen in the chart in the insight). Gross spread as of 3 November is 5.3%. Recommendation is long PNM US, underpinned by stand-alone comparables-based valuation.



Hearing Examiner Recommends Against Iberdrola (Avangrid)/PNM Resources Deal

There have been some important regulatory changes included in the royal decree issued last week, as the Spanish Government uses demagogy and asks for a "social contribution" from utilities to compensate households from the escalation in amount of the electricity bill in Spain.
The negative impact of those regulatory changes on <a href="https://www.smartkarma.com/entities/naturgy-energy-group-sa" target="_blank" data-smartkarma-citation="entities:21271:1" rel="noopener">Naturgy Energy Group SA (NTGY SM)</a>'s income is estimated at around €350 mn, equivalent to 9.2% of 2021e EBITDA and 15.5% of net profit. Nevertheless, the takeover offer has supported Naturgy's share price, in contrast to the strong cuts suffered by <a href="https://www.smartkarma.com/entities/endesa-sa" target="_blank" data-smartkarma-citation="entities:21264:1" rel="noopener">Endesa SA (ELE SM)</a> (-11% in four days) and <a href="https://www.smartkarma.com/entities/iberdrola-sa" target="_blank" data-smartkarma-citation="entities:21276:1" rel="noopener">Iberdrola SA (IBE SM)</a> (-8.8%). See charts in the Insight.
The Board of <a href="https://www.smartkarma.com/entities/naturgy-energy-group-sa" target="_blank" data-smartkarma-citation="entities:21271:1" rel="noopener">Naturgy Energy Group SA (NTGY SM)</a> considers the consideration offered by IFM as "fair", but highlights that the top shareholders will not tender their shares, neither will the Board members, nor will the treasury shares or those held for management compensation be tendered. The Board does not make any recommendation to shareholders to tender. The Board also underlines the negative impact of the takeover bid on the company's corporate governance. The Board thus throws the gauntlet at IFM.
There are four possible bid outcome scenarios:
<ol class="">
<li>
IFM withdraws the bid prior to the end of the offer period "when, due to exceptional circumstances" as per art. 33, sec C of the Takeover Code. The current energy reform undertaken by the Government could support this claim. Probability is very low.</li>
<li>
IFM does not reach the 17% minimum acceptances threshold (although it could hypothetically agree to a 10% threshold) and withdraws the bid. Share price would likely fall.</li>
<li>
IFM achieves its objective without improving the current offer price. The gain is small: gross spread is 2.7%, but there is the risk of apportionment (25% of the share capital could potentially tender), and the share price post-bid could be negatively affected by lack of liquidity. Governmental intervention in the energy market constitutes a good argument for the bidder not to sweeten the offer and also an incentive to tender, in anticipation of a downward adjustment of the post-takeover share price.</li>
<li>
IFM improves the offer. In this case, I do not think that the improvement would be very significant (less than 5%) with a low probability, in my view.</li>
</ol>
I do not see an interesting option holding the shares until the end of the acceptance period (8 October), considering the risks. It could potentially be interesting to stay up to five calendar days before the end of the acceptance period (2 October), in case there is an improvement in IFM's offer during this period and sell upon the news. The option of holding the shares and not tendering them entails a risk of illiquidity (the free-float could be greatly reduced) and the potential for revaluation in the medium term is not excessively attractive (median TP on Capital IQ consensus is €22.37), albeit the dividend yield is c. 5.6%.

There have been some important regulatory changes included in the royal decree issued last week, as the Spanish Government uses demagogy and asks for a "social contribution" from utilities to compensate households from the escalation in amount of the electricity bill in Spain.
The negative impact of those regulatory changes on Naturgy Energy Group SA (NTGY SM)'s income is estimated at around €350 mn, equivalent to 9.2% of 2021e EBITDA and 15.5% of net profit. Nevertheless, the takeover offer has supported Naturgy's share price, in contrast to the strong cuts suffered by Endesa SA (ELE SM) (-11% in four days) and Iberdrola SA (IBE SM) (-8.8%). See charts in the Insight.
The Board of Naturgy Energy Group SA (NTGY SM) considers the consideration offered by IFM as "fair", but highlights that the top shareholders will not tender their shares, neither will the Board members, nor will the treasury shares or those held for management compensation be tendered. The Board does not make any recommendation to shareholders to tender. The Board also underlines the negative impact of the takeover bid on the company's corporate governance. The Board thus throws the gauntlet at IFM.
There are four possible bid outcome scenarios:


IFM withdraws the bid prior to the end of the offer period "when, due to exceptional circumstances" as per art. 33, sec C of the Takeover Code. The current energy reform undertaken by the Government could support this claim. Probability is very low.

IFM does not reach the 17% minimum acceptances threshold (although it could hypothetically agree to a 10% threshold) and withdraws the bid. Share price would likely fall.

IFM achieves its objective without improving the current offer price. The gain is small: gross spread is 2.7%, but there is the risk of apportionment (25% of the share capital could potentially tender), and the share price post-bid could be negatively affected by lack of liquidity. Governmental intervention in the energy market constitutes a good argument for the bidder not to sweeten the offer and also an incentive to tender, in anticipation of a downward adjustment of the post-takeover share price.

IFM improves the offer. In this case, I do not think that the improvement would be very significant (less than 5%) with a low probability, in my view.

I do not see an interesting option holding the shares until the end of the acceptance period (8 October), considering the risks. It could potentially be interesting to stay up to five calendar days before the end of the acceptance period (2 October), in case there is an improvement in IFM's offer during this period and sell upon the news. The option of holding the shares and not tendering them entails a risk of illiquidity (the free-float could be greatly reduced) and the potential for revaluation in the medium term is not excessively attractive (median TP on Capital IQ consensus is €22.37), albeit the dividend yield is c. 5.6%.

IFM/Naturgy: Board Opinion And Bid Scenarios

Solarpack Corp Tecnologica / Event-Driven

On 16 June, EQT Infrastructure, a fund managed by <a href="https://www.smartkarma.com/entities/eqt-ab" target="_blank" data-smartkarma-citation="entities:28922:1" rel="noopener">EQT AB (EQT SS)</a> , <a href="http://cnmv.es/portal/verDoc.axd?t=%7B18435c31-8db9-4abc-b1e4-bf7872682d88%7D" target="_blank" rel="noopener">announced a voluntary takeover bid</a> for 100% of the shares of <a href="https://www.smartkarma.com/entities/solarpack-corp-tecnologica-sa" target="_blank" data-smartkarma-citation="entities:33493:1" rel="noopener">Solarpack Corp Tecnologica (SPK SM)</a>, a developer and owner of solar photovoltaic plants, mainly active in Spain, Chile and India.
Consideration is €26.5/share, in cash, for 100% of the shares, for an implied equity value of €881.2 mn and an implied EV of €1,258.7 mn. This is 10.1x EV/Fwd Revenue and 18.7X EV/Fwd EBITDA.
EQT Infrastructure has signed irrevocable agreements for 50.957% (with €5 mn break-up fee, c. 0.6% of the transaction).
The rationale seems to be the development of the company under EQT ownership.
The offer is not particularly generous on the basis of a median TP on Capital IQ consensus of €29.4/share, but the premium offered is 45% to the prior closing. With a nearly 51% irrevocable undertakings committed, the market is discounting the success of the offer.
The shares increased by 43% and closed at €26.15, a gross spread of 1.3%, c. 4% annualised assuming the deal closes in 9 months.
Albeit the spread is not terribly exciting, I recommend long SPK SM, and would take advantage of any dip to add to the position.

On 16 June, EQT Infrastructure, a fund managed by EQT AB (EQT SS) , announced a voluntary takeover bid for 100% of the shares of Solarpack Corp Tecnologica (SPK SM), a developer and owner of solar photovoltaic plants, mainly active in Spain, Chile and India.
Consideration is €26.5/share, in cash, for 100% of the shares, for an implied equity value of €881.2 mn and an implied EV of €1,258.7 mn. This is 10.1x EV/Fwd Revenue and 18.7X EV/Fwd EBITDA.
EQT Infrastructure has signed irrevocable agreements for 50.957% (with €5 mn break-up fee, c. 0.6% of the transaction).
The rationale seems to be the development of the company under EQT ownership.
The offer is not particularly generous on the basis of a median TP on Capital IQ consensus of €29.4/share, but the premium offered is 45% to the prior closing. With a nearly 51% irrevocable undertakings committed, the market is discounting the success of the offer.
The shares increased by 43% and closed at €26.15, a gross spread of 1.3%, c. 4% annualised assuming the deal closes in 9 months.
Albeit the spread is not terribly exciting, I recommend long SPK SM, and would take advantage of any dip to add to the position.

EQT/Solarpack: Friendly Take-Private Deal

On 18 February <a href="https://www.smartkarma.com/entities/acciona-sa" target="_blank" data-smartkarma-citation="entities:21248:1" rel="noopener">Acciona SA (ANA SM)</a> announced it would list 25% of its renewables subsidiary, Acciona Energías Renovables, and would retain control.
On 7 June, the Spanish Securities and Markets Commission (CNMV) approved the registration document for the IPO, exclusively aimed at institutional investors.
<ul>
<li>
The IPO consists of a secondary offering by parent company Acciona SA and will serve as a preliminary step for Acciona Energias Renovables' admission to trading on the Spanish Continuous Market.
</li>
<li>
Press sources point to a value between €10 bn and €12 bn, the largest IPO in the Spanish market since <a href="https://www.smartkarma.com/entities/aena-sa" target="_blank" data-smartkarma-citation="entities:21244:1" rel="noopener">Aena SA (AENA SM)</a> in 2015. Acciona plans to place around 25% of the capital (30% if the green shoe is added), for which it could raise between €2.5 and €3 bn.
</li>
<li>
The objective is to have the shares listed on the last week of June.
</li>
</ul>
According to Acciona, the rationale of the spin-off is:
<ul>
<li>
financing its ambitious growth plans in renewables: the IPO will allow to accelerate growth goals. The pre-IPO target was to reach 15,000MW in 2024 from 10,700MW in 2020. Now this target is improved to 20,000MW in 2025. Acciona Energías Renovables, as a pure renewables operator, will seek to maximize its growth potential, with an unrestricted balance sheet with access to a more efficient cost of capital. 
</li>
<li>
Acciona will crystallize the value in the group's fastest growing subsidiary. This subsidiary represents 75% of the group's EBITDA, but Acciona receives little recognition for its renewables business and the high proportion of profits these assets now generate.
</li>
</ul>
I calculate Acciona's fair value by using a DCF (Capital IQ consensus, WACC 5.5%, g 1.5%). I add the value of subsidiaries and apply a 15% holding discount.
Fair value is €172.4/share, 25% upside, although planned growth acceleration for Acciona Energías Renovables, should allow further upward revisions in the parent company target prices.
<ul>
<li>
Acciona's shares trade at 10.3x EV/Fwd EBITDA, below 16.1x at which <a href="https://www.smartkarma.com/entities/orsted-a-s" target="_blank" data-smartkarma-citation="entities:24765:1" rel="noopener">Orsted A/S (ORSTED DC)</a> trades.
</li>
<li>
The valuation of Acciona Energías Renovables includes some €4 bn of financial debt, over 4x EBITDA. Assuming a cautious 20% discount on Orsted, or 13.0x EBITDA, Acciona Energías Renovables would be valued at €12,000 mn euros, 87% of the current market of the entire group.
</li>
<li>
Assuming Acciona nets €3 bn, half of the IPO proceeds, €1.5 bn, together with another €1.5 bn from the syndicated loan (see background section), will significantly lower the net debt (and the WACC) of Acciona parent, thus triggering a re-rating of the shares.
</li>
</ul>
Recommendation long ANA SM, TP €172.4, with possibility of further upside.

On 18 February Acciona SA (ANA SM) announced it would list 25% of its renewables subsidiary, Acciona Energías Renovables, and would retain control.
On 7 June, the Spanish Securities and Markets Commission (CNMV) approved the registration document for the IPO, exclusively aimed at institutional investors.


The IPO consists of a secondary offering by parent company Acciona SA and will serve as a preliminary step for Acciona Energias Renovables' admission to trading on the Spanish Continuous Market.


Press sources point to a value between €10 bn and €12 bn, the largest IPO in the Spanish market since Aena SA (AENA SM) in 2015. Acciona plans to place around 25% of the capital (30% if the green shoe is added), for which it could raise between €2.5 and €3 bn.


The objective is to have the shares listed on the last week of June.


According to Acciona, the rationale of the spin-off is:


financing its ambitious growth plans in renewables: the IPO will allow to accelerate growth goals. The pre-IPO target was to reach 15,000MW in 2024 from 10,700MW in 2020. Now this target is improved to 20,000MW in 2025. Acciona Energías Renovables, as a pure renewables operator, will seek to maximize its growth potential, with an unrestricted balance sheet with access to a more efficient cost of capital. 


Acciona will crystallize the value in the group's fastest growing subsidiary. This subsidiary represents 75% of the group's EBITDA, but Acciona receives little recognition for its renewables business and the high proportion of profits these assets now generate.


I calculate Acciona's fair value by using a DCF (Capital IQ consensus, WACC 5.5%, g 1.5%). I add the value of subsidiaries and apply a 15% holding discount.
Fair value is €172.4/share, 25% upside, although planned growth acceleration for Acciona Energías Renovables, should allow further upward revisions in the parent company target prices.


Acciona's shares trade at 10.3x EV/Fwd EBITDA, below 16.1x at which Orsted A/S (ORSTED DC) trades.


The valuation of Acciona Energías Renovables includes some €4 bn of financial debt, over 4x EBITDA. Assuming a cautious 20% discount on Orsted, or 13.0x EBITDA, Acciona Energías Renovables would be valued at €12,000 mn euros, 87% of the current market of the entire group.


Assuming Acciona nets €3 bn, half of the IPO proceeds, €1.5 bn, together with another €1.5 bn from the syndicated loan (see background section), will significantly lower the net debt (and the WACC) of Acciona parent, thus triggering a re-rating of the shares.


Recommendation long ANA SM, TP €172.4, with possibility of further upside.

Spain

Iberdrola S.A. generates, distributes, trades, and markets electricity in the United Kingdom, United States, Spain, Portugal, and Latin America.  The Company specializes in clean energy and more specifically wind power.

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Iberdrola SA (IBE SM)

Iberdrola/PNM Resources: PRC Vetoes the Purchase of PNM

The operation enters an uncertain situation, with a very high probability that it won't materialise. Median implied valuation of PNM Resources...

Jesus Rodriguez Aguilar

Hearing Examiner Recommends Against Iberdrola (Avangrid)/PNM Resources Deal

TP is $50.3, as the deal should complete, in my view, although it may take longer than the initial deadline. Gross spread is 5.3%. Long PNM US,...

Jesus Rodriguez Aguilar

IFM/Naturgy: Board Opinion And Bid Scenarios

It could potentially be interesting to stay up to 2 October, in case there is an improvement in IFM's offer and sell upon the news, unless one...

Jesus Rodriguez Aguilar

EQT/Solarpack: Friendly Take-Private Deal

With 51% irrevocable undertakings, the market is discounting the success of the offer. Fross spread is 1.3%, c. 4% annualised assuming the deal...

Jesus Rodriguez Aguilar

Spin-Off of Acciona Renewables

Acciona trades at 10.3x EV/Fwd EBITDA, below 16.1x for ORSTED DC. IPO should allow value to crystallize and financial debt to be repaid, thus...

Jesus Rodriguez Aguilar

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