Short concessions scare funds off €1bn gas deal

Exxon Mobil and Shell are selling two sets of gas storage assets in Germany with different profiles but the lack of long-term concession contracts for one set of assets is causing infrastructure investors to walk away from the deal or consider realignment with industrial partners.

The majority of the infrastructure funds that were involved in the early stages of bidding for the sale of Exxon Mobil and Royal Dutch Shell’s German gas storage facilities have either withdrawn from the deal or will realign with industrial partners, two sources familiar with the transaction said.

Infrastructure investors including AXA Private Equity, Allianz, EQT, Infracapital Partners and RREEF were all said to have been involved in the early stages of the deal, which saw five teams go through to a second round of bidding.

But many of these infrastructure investors have now either walked away from the deal or are considering realigning with industrial partners due to the complexity of the sales process and the short-term nature of the concession contracts governing some of the gas caverns, which are said to last between three to four years.

At the heart of the problem, explains one source involved in the transaction, is the fact that Exxon Mobil and Shell are concomitantly selling two sets of storage assets with different characteristics. These include assets owned solely by Exxon Mobil and others owned by BEB Erdgas und Erdoel, a joint venture between Exxon Mobil and Shell.

The source explained: “The problem here is that you have two different categories of assets and the characteristics that make some of them interesting for one set of investors are the ones that will discourage other investors with a different profile.”

Part of the problem is the number of storage caverns that have short-term concession contracts, highlighted another source following the process: “Infrastructure investors are abandoning the sale because they want assets with longer concession lengths and lower concession renewal risk. They thought they might find some upside in the deal to mitigate this risk but many of them have now decided to walk away.”

That leaves industrials better positioned in the race, or teams of industrials and infrastructure investors, both sources pointed out. Industrials, such as energy companies, are typically not interested in long concession contracts because they prevent them from immediately trading the assets or using them for other purposes.

GDF Suez is said to be one of the industrials bidding for the storage caverns while French infrastructure fund Antin Infrastructure is thought to have started discussions with German power firm EnBW to submit a joint bid for the assets. One source suggested that AXA Private Equity is still looking at the transaction, but did not elaborate if it would bid alone or join forces with an industrial partner.

The gas storage caverns up for sale have a combined capacity of 4.1 billion cubic metres and are located in Lower Saxony, Baden-Wurttemberg and Hamburg, Reuters reports. The news agency says their enterprise value is estimated at between €500 million and €700 million but could reach €1 billion if the cushion gas needed to keep them operational is factored in. UBS is running the sale.