Investors eye big discount in Enel Green Power IPO

MILAN (Reuters) - Enel (ENEI.MI), Europe's most indebted utility, would have to sell shares in its renewable arm at a big discount to win over investors disappointed with underperforming green energy stocks, an investment manager said.

Enel would do better to delay the sale of Enel Green Power (EGP) -- penciled in for October -- until market conditions improved and green energy policy and regulations in Europe and the United States are clarified, Impax Asset Management portfolio manager Simon Gottelier told Reuters.

Italy's Enel hopes to raise at least 3 billion euros ($3.79 billion) from the sale, which may be Europe's biggest initial public offering (IPO) this year, to help cut its debt pile.

"Enel needs to pay down a significant amount of debt through the proceeds of the IPO, but ipoing in the current market would probably not be ideal timing," Gottelier said.

IMPAX Asset Management (IPX.L), a leading UK environmental investment manager with 6 percent of its nearly $3 billion portfolio invested in renewable energy utilities, favors energy efficiency stocks and would be cautious about EGP's sale.

"Never say never, but it would have to be very deeply discounted," Gottelier said, adding that a discount of about 30-50 percent to the current evaluations in the peer group would lure investors, especially those with a long-term strategy.

Cuts in green energy incentives in Spain and Italy, as well as uncertainty over the future of the U.S. climate change bill pushed stocks in EGP's listed rivals down to trade at less than 10 times projected core earnings (EBITDA) in 2011, he said.

"It's no reflection of the quality of the business. It is simply a very, very challenging market. Listed peer group companies have very high quality, well-run businesses which have done nothing in terms of share performance in the last 18 months," Gottelier said.

HSBC cut target prices on EGP's main rivals such as wind power leaders Spain's Iberdrola Renovables SA IBR.MC and Acciona (ANA.MC), Portugal's EDP Renewables (EDPR.LS) and France's EDF Energies Nouvelles EEN.PA.

"There is probably a more compelling investment story for them (Enel) to IPO the business ... when there is a more clear picture of what is going to happen in the U.S. in terms of support for a federal renewable energy policy," Gottelier said.

Enel has said it would pursue a dual-track process to sell a minority stake in EGP, and could opt for a private placement if it offered a better deal. But, Gottelier doubted Enel would get greater value from a private sale than an IPO.

"There are some large renewable energy funds out there ... which have a substantial negative performance from existing wind project development holdings. I don't think they will be rushing to add to their renewable energy positions," he said.

IMPAX, whose assets under management rose 40 percent to 1.77 billion pounds ($2.73 billion) during the six months to the end of March, was underweight in renewable energy utilities compared to an 11 percent allocation to the sector in its benchmark FTSE Environmental Opportunities All-Share index .FTEOAS.

Investments in energy efficiency and renewable energy account for about 54 percent of IMPAX portfolio, about 20 percent is invested in waste management and the rest in water business, Gottelier said.

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(Editing by Sharon Lindores)