French energy group EDF has received indicative bids for the sale of its UK electricity network earlier this week, a source familiar with the process told InfrastructureInvestor.com.
Three consortia are thought to have submitted initial offers – a Scottish and Southern Energy (SSE)/Borealis team; a Macquarie/ Canada Pension Plan Investment Board/Abu Dhabi Investment Authority consortium; and a team led by Cheung Kong Infrastructure Holdings, a fund owned by Asia’s wealthiest man, Li Ka-shing.
Of those, only SSE has publicly confirmed that it has submitted an offer. It is unclear if high-voltage operator National Grid, one of the original parties mentioned in connection with the deal, has put in a bid. The source suggested National Grid may not have been able to attract a financial partner from the infrastructure community, as it was unclear how aggressively it was prepared to bid for EDF and how seriously it was interested in it.
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 source suggested a shortlist of bidders should be announced in a couple of weeks’ time. But he hinted that the composition of consortia may not remain static, as new players look to join the deal.
One of those players could be Global Infrastructure Partners (GIP). According to various media reports, GIP is interested in the sale and has been talking to several parties although it has yet to join any of the consortia. The source also said he would not be surprised if the likes of Industry Funds Management, which recently bought Vattenfall’s German grid, or Citi Infrastructure Investors will join existing consortia at a later stage.
Barclays Capital, BNP Paribas and Deutsche Bank are running the sale for EDF and are said to be preparing a securitisation package covering 80 percent to 85 percent of the deal’s regulated asset base (RAB).
The company’s UK assets have a RAB of close to £4 billion (€4.4 billion; $6.4 billion), which means that a sale at a 20 percent premium could net EDF close to £5 billion. But tough new rules unveiled by regulator Ofgem in December 2009 are capping shareholder returns more than was initially expected, dampening EDF’s prospects of a good price.
Ofgem said the weighted average cost of capital (WACC) for electricity operators should be set at 4 percent post-tax – half a percentage point below returns allowed by recent regulation in the water sector. The WACC is the average of the cost of equity and debt and effectively regulates what sort of returns shareholders can expect from their investments in the sector.
It has also implemented stringent performance criteria regulating everything from price increases to the baseline return on equity a company can earn – which can fluctuate between 3 percent and 13 percent depending on performance.