French energy group EDF received two binding offers earlier this week for the sale of its electricity network, a source familiar with the deal told Infrastructure Investor.
EDF: may get
A third consortium including utility Scottish and Southern Energy (SSE) and Borealis, the infrastructure investment arm of the Ontario Municipal Employees’ Retirement System, is thought not to have submitted a final offer. The decision is not unexpected, given that SSE warned over a month ago it was not seeking an ownership interest in EDF “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 could find another party to top-up its bid.
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.
Dow Jones reports that the final offers both valued EDF’s network at more than £5 billion, which would represent a premium over its regulated asset base of roughly 20 percent. The news agency also added both bids were fully funded.
Sources had previously suggested that tough new rules unveiled by regulator Ofgem in December 2009 would cap 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.
Ofgem 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.