New York-based private equity firm KKR has launched a bid to acquire 100 percent of ContourGlobal, a power generation operator listed on the London Stock Exchange, for £1.75 billion ($2.18 billion; €2.07 billion).
The offer price of 263.6 per share represents a 36 percent premium to ContourGlobal shares’ closing price on 193.4 pence on 16 May, the day before the bid was announced, and gives the LSE-listed company an enterprise value of $6.14 billion.
ContourGlobal directors and the company’s largest shareholder, Reservoir Capital, which collectively own 72.83 percent of the company, have pledged to vote in favour of the scheme arrangement. For the scheme to become effective, KKR needs to secure the vote of ContourGlobal shareholders representing at least 75 percent in value of the company’s shares.
“KKR believes that ContourGlobal’s existing business provides a compelling platform for significant future organic and inorganic value-accretive growth, driven by the changing nature of the energy industry as a result of decarbonization targets,” according to the regulatory filing.
“KKR believes it can support ContourGlobal in its ESG-positive strategy, which aims at a meaningful 40 percent reduction of CO2 emissions intensity by 2030, and to be net zero carbon by 2050,” it continued.
An undervalued business
ContourGlobal, which was founded in London in 2005, operates 138 power plants across Europe, North America, Latin America and Africa. Of the 6.3GW total installed capacity, the majority is generated by thermal power plants that use natural gas, coal, lignite, oil and diesel. As of 31 December, the company’s thermal group generated an adjusted EBITDA of $541 million.
Its renewables portfolio, which includes wind, solar and hydro plants with a total installed gross capacity of 1.8GW as of 31 December, generated an adjusted EBITDA of $335 million.
While KKR states that private ownership will enable ContourGlobal to invest in the business at greater scale and accelerate investment in the energy transition, it does not specify how it will do so.
The firm declined to comment beyond the regulatory filing, but sources close to the deal told Infrastructure Investor that KKR will seek to do so through a combination of divesting thermal assets, making them more sustainable and expanding the company’s renewables business. If, and when, the scheme is approved, KKR will then conduct due diligence on an asset-by-asset basis, these sources said.
At the moment, ContourGlobal is in the process of selling nine run-of-river hydro assets in Brazil, with a total gross capacity of 168MW to Pátria Investimentos for $313 million. The deal, announced in January, is expected to close in the second quarter. “The process to dispose of our Brazilian wind assets continues to move forward in line with expectations,” ContourGlobal said in a trading update on 13 May.
Net proceeds of approximately $110 million from the Brazilian hydro assets, “provide additional capacity to re-invest in new growth opportunities or to be returned to shareholders”, the company said in its FY 2021 results presentation in March.
While the company has performed well financially – it has increased adjusted EBITDA by more than 60 percent over four years, “ContourGlobal shares continue to trade at a discount to its IPO price which significantly undervalues the business”, according to the filing.
KKR will finance the all-cash transaction through a combination of equity – through Global Infrastructure Investors IV, which it closed in March on $17 billion – and debt.
Should the bid for ContourGlobal succeed, it will be the second take-private transaction KKR has completed through Fund IV. The first was the acquisition of US data centre REIT CyrusOne, alongside GIP, for $15 billion. Other known investments KKR has made through its fourth flagship fund include Netherlands-headquartered Refresco, a global independent beverage solutions provider for retailers and branded beverage companies, owning more than 70 manufacturing sites in Europe and North America; and two fibre deals, one with Téléfonica in Colombia and one in the US with Metronet.
The fund has a targeted gross IRR of 14-15 percent and a net IRR of 12-13 percent.