US utility buys E.ON’s UK network for £4bn

PPL Corporation has beat competition from Cheung Kong Infrastructure to acquire the UK’s second-largest electricity distribution network. Bank of America Merrill Lynch and Credit Suisse will lend the US utility £3.6bn to help fund the deal, which is expected to close in April.

PPL Corporation, the Pennsylvania-based utility group, has acquired German firm E.ON’s UK electricity distribution business yesterday, transforming the US utility into the owner and operator of the largest network of electricity distribution companies in the UK.

E.ON’s UK electricity transmission network, the UK’s second-largest distribution network, spans over 133,000 kilometres of transmission lines in central England, serving five million people in cities like Birmingham and Nottingham. It is also adjacent to PPL’s existing UK operations in England and Wales, which include about 83,000 kilometres of transmission lines serving 2.6 million customers.

Those synergies might have allowed PPL to go the extra mile to outbid Cheung Kong Infrastructure, the Hong Kong-listed company controlled by billionaire Li Ka-Shing, widely tipped by market observers to win the auction in the beginning of the week.

Mark Freshney, an analyst at Credit Suisse, told Bloomberg that PPL paid a 30 percent premium to the asset’s regulated value. In comparison, Cheung Kong paid a 25 percent premium when it acquired the UK’s largest transmission network last year from French power group EDF for £5.78 billion (€6.78 billion; $9.63 billion). EDF’s distribution network serves about 7.8 million people.

PPL said it bought E.ON’s UK grid, known as Central Networks, for £3.5 billion in cash and £500 million of existing debt. The deal is expected to close in April, PPL said. Bank of America Merrill Lynch and Credit Suisse will lend £3.6 billion to help fund the deal with the remainder to be financed via equity and convertible equity units.

For the US utility, the purchase allows it fulfil its plans of deriving an ever increasing percentage of its earnings from regulated activities.

Regulated returns comprised some 27 percent of PPL’s earnings in 2010 but are expected to amount to half of this year’s earnings following the purchase of Central Networks. In 2013, the company expects three-quarters of its earnings before interest, tax, depreciation and amortisation (EBITDA) to come from its regulated businesses.

E.ON chief executive Johannes Teyssen said the “purchase price represents excellent value for E.ON and the proceeds will be a key contribution towards our €15 billion divestment target by the end of 2013”.

This is not the first time both companies have done business together. Last year, E.ON sold its US Midwest business to PPL for $7.6 billion.