Binding bids for EDF network delayed

A second, binding round of bidding for French energy group EDF’s UK electricity network has been postponed until mid-July. Bigger than expected capex requirements and regulatory issues surrounding a £200m pension deficit are said to be behind the delay.

The three consortia in the race to acquire French energy group EDF’s UK electricity network are now expected to submit their binding bids around mid-July from today’s original deadline, a source close to the deal said.

EDF: binding bids now
expected mid-July

EDF’s UK network distributes power to almost eight million homes in the south-east and east of England and was put up for sale in October 2008 to help cut the group’s debt. The company’s UK assets have a regulated asset base of close to £4 billion (€4.4 billion; $6.4 billion) with a potential buyer expected to have to write an equity cheque of between £1 billion and £1.5 billion.

The reasons behind the delay are said to range from financing issues to the regulatory treatment of an up to £200 million pension deficit. Neil McGee, finance director at Hongkong Electric, which is bidding for EDF together with sister company Cheung Kong Infrastructure, suggested in a statement last week that securing financing for the bid was taking some time and that he had been surprised by bigger than expected capex requirements.

“We found out that a lot more money than we originally expected has to be spent to bring the network’s reliability up to Hongkong Electric’s standards and we would have to take this into consideration when we are making a bid,” he said, adding: “We are working very hard on getting the financing in place [but] given the European situation at the moment, financing is not as straightforward as in the past.”

His comments echoed earlier remarks in May by Ian Marchand, the chief executive of Scottish and Southern Energy (SSE): “The early signs are that the operational challenges are bigger than we thought. Their [EDF’s] supply reliability statistics have deteriorated. They are less integrated than we thought they would be.”

SSE, together with Borealis, the infrastructure investment arm of the Ontario Municipal Employees’ Retirement System, is one of the three consortia bidding for the asset. However, SSE said earlier this month that it would not seek an ownership interest “that would need to be funded by issuing new shares”, prompting speculation that it was not looking to acquire more than a 10 percent holding in EDF unless it can find another party to top-up its bid.

The third consortium bidding for EDF comprises Macquarie, the Canada Pension Plan Investment Board and the Abu Dhabi Investment Authority.

Another issue which is said to be delaying the second round of bidding has been the due diligence surrounding the treatment of a pension deficit created by a change of control clause, the Sunday Times first reported last week. According to the clause, the new buyer could be forced to pay EDF’s pension fund between £100 million and £200 million.

The source said all bidders were aware of this issue when they were conducting due diligence on EDF and what they are now trying to understand is “the regulatory treatment of the pension deficit”.