European Event-Driven Analyst

Jesus Rodriguez Aguilar

Event-Driven

Naturgy soars c. 16%, to €22.27 at closing, after Australian fund IFM Global Infrastructure has communicated its intention to launch an unexpected partial takeover offer for 22.69% of the capital. This is an operation valued at 5,060 million euros. Specifically, the offer is aimed at 220 million shares of the energy company at a price of €23 per share, which represents a premium of more than 20% compared to yesterday's closing price, of 22.7% over the VWAP of the last three months and 28.9% of the VWAP of the last six months.
IFM, with a long-term investment outlook, has taken advantage of the weakness of Naturgy in the current conjuncture to launch its offering.
Shareholders representing 41.36% of the capital stock have agreed not to attend the operation. These shareholders are Rioja Acquisition with 20.72% of the capital stock and the GIP fund with an additional 20.64%. Rioja Acquisition is the vehicle formed by CVC and Corporación Financiera Alba when they bought the 20% held by Repsol.
<ul>
<li>In addition to retail investors, the offer is directed to Criteria Caixa, which controls 24% of the capital and is the largest shareholder in Naturgy. Moreover, Sonatrach, the Algerian company that controls the fields in the Arab country and is a historical partner of Naturgy, controls 3.85%.</li>
<li>Although it is an offer for 22.7% of the capital stock, the effective percentage is higher since Rioja Acquisition and GIP have decided not to participate in the operation.</li>
<li>Under these conditions, the effective offer is for over 39% of the shares.</li>
</ul>
IFM's takeover bid revalues ​​the 24.4% stake of Criteria Caixa in Naturgy to €5,528 mn. Criteria will play a key role in the operation, since Rioja (mainly CVC) and GIP will not sell. That said, the ultimate owner of Criteria, Fundación La Caixa relies on the dividends of its investments to fund its social and charitable work. The Fundación management will probably debate about investing in a more diversified portfolio with the proceeds of a hypothetical acceptance of IFM's bid.
At the proposed offer price, IFM would obtain a 6.6% gross dividend yield.
Taking comparable companies, the median implied share price on a 9.5x EV/Fwd EBITDA basis is €23.1 per share (vs. 8.6x for Naturgy prior to the offer announcement). On that basis, the offer looks fair.
<ul>
<li>I find it an attractive offer for minority shareholders. Moreover, the free float will be greatly reduced after this offer (below 10%).</li>
</ul>
I recommend LONG NTGY SM and tender into IFM's partial offer (gross spread is 3.7%). Failure to tender would mean keeping a share with reduced liquidity and a dividend yield (according to Factset estimates) of around 6.6% for 2021e.
A counteroffer by a rival bidder must be made no later than 15 business days of the publication of the offer prospectus, although it may be possible to announce an intention to offer after this cut off point.

Naturgy soars c. 16%, to €22.27 at closing, after Australian fund IFM Global Infrastructure has communicated its intention to launch an unexpected partial takeover offer for 22.69% of the capital. This is an operation valued at 5,060 million euros. Specifically, the offer is aimed at 220 million shares of the energy company at a price of €23 per share, which represents a premium of more than 20% compared to yesterday's closing price, of 22.7% over the VWAP of the last three months and 28.9% of the VWAP of the last six months.
IFM, with a long-term investment outlook, has taken advantage of the weakness of Naturgy in the current conjuncture to launch its offering.
Shareholders representing 41.36% of the capital stock have agreed not to attend the operation. These shareholders are Rioja Acquisition with 20.72% of the capital stock and the GIP fund with an additional 20.64%. Rioja Acquisition is the vehicle formed by CVC and Corporación Financiera Alba when they bought the 20% held by Repsol.

In addition to retail investors, the offer is directed to Criteria Caixa, which controls 24% of the capital and is the largest shareholder in Naturgy. Moreover, Sonatrach, the Algerian company that controls the fields in the Arab country and is a historical partner of Naturgy, controls 3.85%.
Although it is an offer for 22.7% of the capital stock, the effective percentage is higher since Rioja Acquisition and GIP have decided not to participate in the operation.
Under these conditions, the effective offer is for over 39% of the shares.

IFM's takeover bid revalues ​​the 24.4% stake of Criteria Caixa in Naturgy to €5,528 mn. Criteria will play a key role in the operation, since Rioja (mainly CVC) and GIP will not sell. That said, the ultimate owner of Criteria, Fundación La Caixa relies on the dividends of its investments to fund its social and charitable work. The Fundación management will probably debate about investing in a more diversified portfolio with the proceeds of a hypothetical acceptance of IFM's bid.
At the proposed offer price, IFM would obtain a 6.6% gross dividend yield.
Taking comparable companies, the median implied share price on a 9.5x EV/Fwd EBITDA basis is €23.1 per share (vs. 8.6x for Naturgy prior to the offer announcement). On that basis, the offer looks fair.

I find it an attractive offer for minority shareholders. Moreover, the free float will be greatly reduced after this offer (below 10%).

I recommend LONG NTGY SM and tender into IFM's partial offer (gross spread is 3.7%). Failure to tender would mean keeping a share with reduced liquidity and a dividend yield (according to Factset estimates) of around 6.6% for 2021e.
A counteroffer by a rival bidder must be made no later than 15 business days of the publication of the offer prospectus, although it may be possible to announce an intention to offer after this cut off point.

IFM Investors to Launch a Partial Hostile Tender Offer for Naturgy

The Spanish Government ends, de facto, the liberalizing regime that ruled over the Spanish economy since 1999, because it considers necessary to limit the possible acquisitions of strategic Spanish companies by ANY foreign investor after the COVID-19 hit.
The Spanish Government enhances anti-takeover rules:
<ul>
<li>Temporarily until June 30, 2021, the Government has suspended the liberalization regime for foreign direct investments made by residents and other countries of the EU and the EFTA. Any attempt to acquire over 10% of a Spanish listed company by any EU or EFTA corporate or investor must be approved by the Cabinet.
</li>
<li>In the case of investments of non-EU origin, the suspension of the liberalization regime is maintained indefinitely, until a new legislative change is introduced.</li>
<li>This protects the Ibex 35 companies from takeover raids by European rivals.</li>
</ul>
This rule could make it possible to avoid hypothetical bids of <a href="https://www.smartkarma.com/entities/total-sa" target="_blank" data-smartkarma-citation="entities:812:1" rel="noopener">Total Sa (FP FP)</a> or <a href="https://www.smartkarma.com/entities/eni-spa" target="_blank" data-smartkarma-citation="entities:21185:1" rel="noopener">Eni SpA (ENI IM)</a> for <a href="https://www.smartkarma.com/entities/repsol-sa" target="_blank" data-smartkarma-citation="entities:21292:1" rel="noopener">Repsol SA (REP SM)</a> or <a href="https://www.smartkarma.com/entities/deutsche-telekom-ag" target="_blank" data-smartkarma-citation="entities:21611:1" rel="noopener">Deutsche Telekom Ag (DTE GR)</a> for <a href="https://www.smartkarma.com/entities/telefonica-sa" target="_blank" data-smartkarma-citation="entities:21299:1" rel="noopener">Telefonica SA (TEF SM)</a> , which have been the subject of rumours in the market.
<ul>
<li>Analysts see Repsol and Telefónica as the most vulnerable members of the IBEX 35 index, due to their current low valuation. Repsol trades at 4.9x EV/Forward EBITDA vs. the median of comparable companies, 6.3x. Telefonica is trading at 5.2x EV/Forward EBITA vs. the median of comparable companies, 6.5x.</li>
</ul>
Some transactions that are underway could be affected. For example, the French group Vinci agreed to buy the industrial services division of ACS, for over €5 bn (for reference: <a href="https://www.smartkarma.com/insights/acs-unlocking-value-via-disposals" target="_blank" data-smartkarma-citation="insights:44311" rel="noopener">ACS: Unlocking Value Via Disposals</a>).

The Spanish Government ends, de facto, the liberalizing regime that ruled over the Spanish economy since 1999, because it considers necessary to limit the possible acquisitions of strategic Spanish companies by ANY foreign investor after the COVID-19 hit.
The Spanish Government enhances anti-takeover rules:

Temporarily until June 30, 2021, the Government has suspended the liberalization regime for foreign direct investments made by residents and other countries of the EU and the EFTA. Any attempt to acquire over 10% of a Spanish listed company by any EU or EFTA corporate or investor must be approved by the Cabinet.

In the case of investments of non-EU origin, the suspension of the liberalization regime is maintained indefinitely, until a new legislative change is introduced.
This protects the Ibex 35 companies from takeover raids by European rivals.

This rule could make it possible to avoid hypothetical bids of Total Sa (FP FP) or Eni SpA (ENI IM) for Repsol SA (REP SM) or Deutsche Telekom Ag (DTE GR) for Telefonica SA (TEF SM) , which have been the subject of rumours in the market.

Analysts see Repsol and Telefónica as the most vulnerable members of the IBEX 35 index, due to their current low valuation. Repsol trades at 4.9x EV/Forward EBITDA vs. the median of comparable companies, 6.3x. Telefonica is trading at 5.2x EV/Forward EBITA vs. the median of comparable companies, 6.5x.

Some transactions that are underway could be affected. For example, the French group Vinci agreed to buy the industrial services division of ACS, for over €5 bn (for reference: ACS: Unlocking Value Via Disposals).

Enhanced Limits to Investments in Spanish Companies

Spain

Naturgy Energy Group S.A. distributes natural gas. The Company operates gas storage facilities, as well as owns and operates a fiber optic backbone telecommunications networks. Naturgy Energy Group also markets energy management products, household gas appliances, and installs gas heating systems. Naturgy Energy serves clients worldwide.

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Naturgy Energy Group SA (NTGY SM)

IFM Investors to Launch a Partial Hostile Tender Offer for Naturgy

Criteria Caixa must decide whether to tender. I recommend LONG NTGY SM (gross spread 3.7%). Failure to tender would mean keeping a share with...

Jesus Rodriguez Aguilar

Enhanced Limits to Investments in Spanish Companies

Any attempt to acquire over 10% of a Spanish listed company by any foreign investor must be approved by the Cabinet. This could prevent bids of...

Jesus Rodriguez Aguilar

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52-week Range

Market Cap (USDm)

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