EDF may help infrastructure M&A regain some spark

LONDON/AMSTERDAM Fri Aug 28, 2009 8:38am EDT

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LONDON/AMSTERDAM (Reuters) - EDF's possible sale of British or French power networks worth billions of euros suggests infrastructure dealmaking is set to recover after a dismal year for the once-hot asset class.

The French utility owns Britain's biggest electricity distribution network and France's power grid RTE. It has not begun any formal sales process for either, but bankers and investors say advisers are working toward possible sales.

A successful deal could lift sentiment in the sector, spur similar disposals by rivals, and offer useful pointers on debt availability and bid premiums for infrastructure mergers and acquisitions (M&A).

"The EDF deal is going to be an interesting test case for the market which has been very difficult," said Martin Nelson-Jones at Freshfields Bruckhaus Deringer in London.

"A number of deals have struggled and the market would benefit enormously from a deal of significant size being done," said Nelson-Jones, who heads a team of lawyers working with infrastructure funds.

"This would not only boost confidence but also help everyone see where the market stands now for asset and debt prices."

An EDF spokesman said it was reviewing a range of possible disposals to cut net debt by at least 5 billion euros but declined to comment further before any decision.

"CORE"

The French and UK units work in different stages of electricity supply: France's RTE transmits electricity from power stations over high-voltage lines, while the UK "wires," one stage further on, take power from the grid to consumers.

Bankers and investors say Deutsche Bank and Barclays Capital have spent months working on EDF's UK "wires," and infrastructure funds are sizing up the business and possible joint bids. The banks declined to comment.

EDF's three adjacent UK networks serve 20 million people in London, the east and southeast of England, and have a regulated value of more than 3.5 billion pounds.

Electricity infrastructure is both heavily regulated and relatively shielded from swings in demand, unlike some other areas such as toll roads, marking it as "core" infrastructure.

That means the UK networks are likely to attract big players such as Goldman Sachs, Macquarie, Morgan Stanley, Global Infrastructure Partners, Canada's Borealis, and Deutsche Bank's

RREEF. The smaller 3i Infrastructure has said it is keen on these types of assets.

But the networks' size means funds will have to team up, provide more than 1 billion pounds of equity, and arrange a hefty debt package. Some may feel they have already invested enough in sterling assets, or those subject to UK regulators.

Still, they may be able to keep the networks' existing 1.55 billion pounds of sterling bonds outstanding. And recent refinancing by UK network Electricity North West and gas distributor Wales & West show some bond-market appetite.

There may also be interest from the few utilities that are not shedding regulated assets to focus on power generation. Newspapers have said Scottish & Southern may bid.

SECURITY

If the UK deal's size is a challenge, the sale of RTE -- with an enterprise value of as much as 10 billion euros -- could be even tougher, and bankers say EDF has considered selling just 49 percent. Rothschild is advising EDF on this, bankers say.

A further complication is that French law says RTE must be publicly owned, meaning private buyers must team up with a state firm to bid for the grid.

Some investors hope that the law will change but, as it stands, bankers say that means the top contender is state bank Caisse des Depots (CDC), advised by HSBC.

A successful deal in either country would contrast with several recent auctions that have suffered from scarce debt finance, regulatory uncertainty, or unbridgeable price disputes -- though some smaller deals with clearer rules have succeeded.

Troubled deals include the year-long sale of London's Gatwick airport, the scrapped auction of Dutch waste manager Essent Milieu, and two big failed U.S. privatizations.

Meanwhile Vattenfall is close to selling its German power grid to funds, but fuzzy regulation and worries about capital-expenditure discouraged bidders and kept a lid on the price.

EDF could prompt rivals, who also have multi-billion euro asset-disposal targets, to follow suit, including E.ON AG with a network in central England, and Iberdrola SA, whose Scottish Power unit runs two UK networks.

David Simpson at KPMG said infrastructure was likely to be one of the first sectors where takeover activity would recover, because of its "safety, security, and a greater ability ... to forecast revenues." But he said ongoing debt-rationing meant a rapid return to boom-year deal volumes was unlikely.

(Editing by Jon Loades-Carter)

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