European Event-Driven Analyst

Jesus Rodriguez Aguilar

Jesús is an Insight Provider (Event-driven) on the Smartkarma network, where he looks across sectors at opportunities arising from securities mispricing (both credit and equity), share classes, bid announcements, prospective bids, and special situations. He has served as Economic and Business Advisor at the Spanish Congress in Madrid. Prior to that, he has worked in the City of London: as a Credit Analyst at Bloomberg; Event-driven associate at former boutique European Research; and doubled as Special Situations and Equity-linked VP (convertible bonds) at Merrill Lynch. Jesús has an MBA from the London Business School, a BA (Hons.) degree in Economics from the Complutense University in Madrid, and a BA (Hons.) in Law from U.N.E.D., also in Madrid.

IFM's Partial Offer for Naturgy: Role of Spanish Government and Apportionment Scenarios

IFM Investors to Launch a Partial Hostile Tender Offer for Naturgy

Enhanced Limits to Investments in Spanish Companies

Event-Driven

<p>IFM has adjusted the consideration of its partial offer for <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>  down to € 22.37 per share to account for the dividend payment.</p>
<p>The Spanish government's lukewarm reaction and lack of definition regarding IFM's partial bid on Naturgy, which the government may veto, is <strong>beginning to unsettle</strong> investors, although I believe the Cabinet will ultimately give the green light.</p>
<div>
<ul>
<li>
<p>Three Gorges is asking for permission to acquire a renewable assets portfolio (some 400 MW for €500 mn). I believe it would be difficult to give authorisation to the Asian group and hinder IFM.</p>
</li>
<li>
<p>There aren't any strong arguments to argue that the purchase of a 22.7% stake of Naturgy by an Australian pension manager could jeopardize energy supply.</p>
</li>
<li>
<p>Neither IFM will have control of the company, nor does it look like a short-term speculative investor that is going to dismantle Naturgy, but rather a group that manages its long-term assets to ensure the benefit of its pensioners for decades.</p>
</li>
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<p>An additional risk is that Government approval takes longer than six months.</p>
</li>
</ul>
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<p>The offer is attractive for minorities whom will most likely tender their shares:</p>
<ol style="list-style-type: lower-roman;">
<li>The price represents a 28.9% premium compared to the H2 2020-VWAP;</li>
<li>The percentage of shares that would be accepted in the offer could reach up to 79% of the total. GVG, GIP and CF Alba (41.4% of the capital) have said that they will not tender. This means raising the effective percentage of shares that could be accepted in the bid to 39.3%. If CriteriaCaixa (24.8% of the capital) and Sonatrach (3.8%) do not tender either, the effective apportionment would increase to 78.6%;</li>
<li>I see interloper risk as highly unlikely (although not completely ruled out).</li>
<li>IFM requires a minimum of 17% of the capital tendered (another source of risk).</li>
</ol>
</div>
<div>
<p><em>What does a <strong>TP of €21.98</strong> discount?</em> This price assumes that 50% of the shares are accepted in the offer at a price of €22.37 per share and the rest of the shares trade at c. €21.6 (Capital IQ consensus median TP). This scenario seems relatively positive.</p>
<p>Upside risks:</p>
<ol style="list-style-type: lower-roman;">
<li>Analysts generally consider the offer attractive, most advise tendering, given the uncertainties that arise about Naturgy's business strategy and because of the liquidity risk that a low free float would imply. Nevertheless some have raised their target prices up to 18% above the adjusted offer price, and the comparables median implied EV/Fwd EBITDA implies a TP of €22.14 per share, just below the adjusted offer.</li>
<li>Prospects offered by its business reorganization, with more investment in renewables and sale of non-strategic assets, look good.</li>
<li>The strategic plan that Naturgy intends to present could also be taken positively by the market and the share price could rise above the offer. That said, the only guidance that Naturgy has provided is that it anticipates an increase in ordinary EBITDA by 2021. An improvement in the economic prospects, renegotiation of contracts and investments in renewables should allow this progress.</li>
</ol>
</div>
<div>
<p>The announcement of the takeover bid, on January 26, was underpinning the share price, a 5.5% gross dividend yield (NTM dividends, according to Capital IQ consensus) also acts as a support.</p>
<p><strong>Gross spread</strong> to the offer price is <strong>6.7%</strong>. Reiterate <strong>long NTGY SM</strong>. TP €21.98.</p>
</div>
</div>

IFM has adjusted the consideration of its partial offer for Naturgy Energy Group SA (NTGY SM)  down to € 22.37 per share to account for the dividend payment.
The Spanish government's lukewarm reaction and lack of definition regarding IFM's partial bid on Naturgy, which the government may veto, is beginning to unsettle investors, although I believe the Cabinet will ultimately give the green light.



Three Gorges is asking for permission to acquire a renewable assets portfolio (some 400 MW for €500 mn). I believe it would be difficult to give authorisation to the Asian group and hinder IFM.


There aren't any strong arguments to argue that the purchase of a 22.7% stake of Naturgy by an Australian pension manager could jeopardize energy supply.


Neither IFM will have control of the company, nor does it look like a short-term speculative investor that is going to dismantle Naturgy, but rather a group that manages its long-term assets to ensure the benefit of its pensioners for decades.


An additional risk is that Government approval takes longer than six months.





The offer is attractive for minorities whom will most likely tender their shares:

The price represents a 28.9% premium compared to the H2 2020-VWAP;
The percentage of shares that would be accepted in the offer could reach up to 79% of the total. GVG, GIP and CF Alba (41.4% of the capital) have said that they will not tender. This means raising the effective percentage of shares that could be accepted in the bid to 39.3%. If CriteriaCaixa (24.8% of the capital) and Sonatrach (3.8%) do not tender either, the effective apportionment would increase to 78.6%;
I see interloper risk as highly unlikely (although not completely ruled out).
IFM requires a minimum of 17% of the capital tendered (another source of risk).



What does a TP of €21.98 discount? This price assumes that 50% of the shares are accepted in the offer at a price of €22.37 per share and the rest of the shares trade at c. €21.6 (Capital IQ consensus median TP). This scenario seems relatively positive.
Upside risks:

Analysts generally consider the offer attractive, most advise tendering, given the uncertainties that arise about Naturgy's business strategy and because of the liquidity risk that a low free float would imply. Nevertheless some have raised their target prices up to 18% above the adjusted offer price, and the comparables median implied EV/Fwd EBITDA implies a TP of €22.14 per share, just below the adjusted offer.
Prospects offered by its business reorganization, with more investment in renewables and sale of non-strategic assets, look good.
The strategic plan that Naturgy intends to present could also be taken positively by the market and the share price could rise above the offer. That said, the only guidance that Naturgy has provided is that it anticipates an increase in ordinary EBITDA by 2021. An improvement in the economic prospects, renegotiation of contracts and investments in renewables should allow this progress.



The announcement of the takeover bid, on January 26, was underpinning the share price, a 5.5% gross dividend yield (NTM dividends, according to Capital IQ consensus) also acts as a support.
Gross spread to the offer price is 6.7%. Reiterate long NTGY SM. TP €21.98.



Naturgy - IFM: 対価調整、新たなTP、魅力的なスプレッド