Finnish state-owned utility Fortum Oyj agreed to buy the Uniper SE shares held by a pair of activist investors, increasing its stake in the German power producer to more than 70.5% and bringing the curtain down on a transaction that had been in the works for over a year.
The €2.3 billion deal, which sees Fortum acquire a further 20.5% interest in Uniper from Elliott Management Corp., Knight Vinke Asset Management LLC and their affiliates, will "create a leader in the European energy transition," Fortum President and CEO Pekka Lundmark told analysts on a call after announcing the transaction on Oct. 8.
Lundmark acknowledged that negotiations with Uniper had been ongoing for more than a year and — until now — "far too little has come out of them." Fortum, which currently has a 49.99% stake in Uniper, has faced resistance from the German company over its attempts to gain majority control.
Uniper's CEO and CFO agreed to step down in February and Fortum's Lundmark confirmed in July that cooperation talks had restarted, paving the way for a potential agreement. But the company said in its announcement that the discussions still ended "short of actions."
Elliott and Knight Vinke, which will no longer own shares in Uniper after closing of the deal, had previously proposed resolutions in a bid to break the deadlock between Uniper and Fortum. As part of the eventual agreement, Fortum has ruled out imposing any domination agreement or squeeze-out on Uniper for at least two years.
"The way we see these two years is really to calm down the situation," said Lundmark, allowing the two management teams to create a joint vision strategy and operational plan. "This is really a sign from our point-of-view that we do want to create this plan together with [Uniper]."
Russian clearance
A major obstacle in Fortum's search for majority ownership has been a water testing license held by a Uniper subsidiary in Russia. The license, deemed a strategic asset by Russia, led regulators there to impose an ownership limit of below 50%.
As such, the transaction with Elliott and Knight Vinke still relies on regulatory approval from Russia, and Fortum said it has made a preparatory filing to the Russian Federal Antimonopoly Service, with a decision expected by the end of the first quarter of 2020.
"We have had extensive discussions with Russian authorities on this 50% limitation that they imposed on us, and those discussions have led us to believe that there is a solution available to the issue," Lundmark said Oct. 8, without disclosing specific details. "Of course I cannot preempt the decision by the authorities; we have to let them do their work."
Fortum already received unconditional merger clearance from the European Commission in 2018, though the transaction does require a green light from the U.S.
Combined weight
The impact of the transaction on Fortum and Uniper's long-term credit rating remains to be seen, with S&P Global Ratings saying previously that a takeover could result in a downgrade. On the Oct. 8 call, Fortum CFO Markus Rauramo said the company was committed to retaining its investment grade rating, as well as its access to affordably priced capital.
The Finnish utility is financing the Uniper investment with existing cash resources and credit facilities underwritten by Barclays Bank PLC. Once complete, it intends to fully consolidate Uniper as a subsidiary in its financial statements. The pair's combined comparable EBITDA for the second quarter of 2019 would stand at €2.88 billion, Fortum said in its announcement.
"There is several potential sources for synergies," Lundmark said, highlighting the companies' activities in Sweden and Russia. He added that the deal will also give Fortum access to Germany and other continental European markets where the pair have very little overlapping businesses, and lauded the role of Uniper's gas assets in the context of the European-wide coal phaseout.
The share of coal and lignite in Fortum and Uniper's combined generation portfolio would stand at 18% of the total mix, Lundmark said. "Obviously the carbon footprint is an important consideration," he added. "We would expect that share to shrink over time."
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