Global Insight Perspective | |
Significance | RWE has reportedly tabled an £11-billion (US$21.7-billion) offer for British Energy and is presently conducting due diligence, with EDF in a similar position. |
Implications | At this stage, neither of the offers looks likely to win over British Energy shareholders, but the events are a further indication of the intense interest in the company and suggest that it is only a matter of time before a deal is struck. |
Outlook | Completion of due diligence will probably see new offers put forward by the interested parties, with the formation of a consortium to takeover the group remaining a distinct possibility. |
Offers on the Table
The confirmation from the U.K. government at the beginning of the year that it would allow a new generation of nuclear power plants to be built in the country has sparked a storm of discussions among European utilities as they seek to position themselves as preferred investors in such projects. At the centre of these discussions is British Energy, the operator of the majority of the United Kingdom's existing suite of nuclear power plants and owner of the most appropriate sites for new plant construction. In fact, the company's strategic position in the U.K. nuclear industry has not only made it a vital partner for discussions on the planning of new nuclear power plants, but has made the company itself a potential takeover target for Europe's acquisition-oriented mega-utilities.
Its position as a takeover target was confirmed in March when U.K. Business Secretary John Hutton announced that the government would drop its previous commitment to retain a minimum 29.9% stake in British Energy, opening the door for a full takeover. Since that time, speculation has continued to swirl over the takeover intentions of several European utilities that were known to be engaged in discussions with British Energy on new nuclear investment, including German groups RWE and E.ON, EDF, Spain's Iberdrola, and the United Kingdom's Centrica. In recent weeks, EDF, Centrica, and RWE have emerged as the leading candidates to launch such a takeover, with some suggestion that the companies could combine to form a consortium to achieve the acquisition (see United Kingdom: 7 April 2008:Centrica, RWE, EDF in Talks on British Energy Bid).
However, new reports suggest the companies may have progressed further down the takeover path than was previously thought. The Financial Times today reports that RWE has in fact already tabled an indicative all-cash offer for British Energy of close to 700 pence per share, valuing the company at up to £11 billion. The newspaper claims that the offer was made several weeks ago, even before British Energy confirmed that it was in talks that could lead to a full takeover (see United Kingdom: 17 March 2008:British Energy Could Face Takeover). RWE has now been granted access to British Energy's data room, and is carrying out due diligence on its offer. News of the offer gave a further boost to British Energy shares, pushing them up by almost 30 pence or 4% in early trading today.
Furthermore, the Financial Times reported that EDF is also conducting due diligence on a bid. The French company apparently made an initial offer to buy a part of British Energy in an attempt to avoid taking on responsibility for the company's ageing advanced gas-cooled reactors (AGRs), which have been riddled with maintenance problems in recent years. U.K. utility Centrica was also reported to have lodged an all-share offer for British Energy, although its bid is considered unlikely to be a favoured option at this stage.
Outlook and Implications
Despite the fact that there may already be three offers on the table, British Energy is unlikely to rush into a quick sale. The company is apparently still mulling over whether to sell to a single buyer or a consortium of bidders, and has yet to trigger a formal auction process. The U.K. government will also take an active interest in the takeover process, and will look to ensure that any final deal leaves scope for competition in the construction of new nuclear power plants in the country.
While details on the bids remain scarce, it is likely that none of the existing offers will be sufficient to win an immediate takeover of British Energy. With interest in the company clearly strong, British Energy shareholders would be best placed launching an open and competitive bidding process in order to attract the strongest possible price. Following completion of due diligence, RWE and EDF are expected to make new offers for the company, which could well prove the trigger for a competitive process to be launched. RWE is considered to be well placed financially to put forward an attractive offer as its low existing debt levels leave it with ample room to leverage funding. However, EDF remains a strong competitor and can position itself as a solid strategic choice given its vast experience in operating nuclear facilities in France.
Furthermore, with interested utilities also engaged in discussions with each other, there still remains potential for a joint bid to be lodged. Such an approach could be attractive both for the bidders, who would share the risk posed by British Energy's ageing nuclear fleet while still gaining a strong position to participate in the construction of new nuclear plants, and for British Energy, which would gain access to a range of expertise and financing as it looks to move forward with new plant construction. The government may also see a sale to a consortium as a more favourable option as it would assist with retaining competition in the process to build new plants. This attractiveness could be further enhanced if Centrica were one of the consortium partners, allowing ongoing U.K. ownership of a strategically important company. At this stage, the possibilities remain open. However, it is now becoming increasingly clear that it will only be a matter of time before a deal on the future ownership of British Energy is struck.