's of Noble Americas EnergySolutions LLC marks back-to-back years that the generator hassought to complement its wholesale business with additional retail territory,as the company looks to manage power price volatility by aligning itsgeneration with electric retail load.
Thepurchase of NAES, made in $800 million in cash and another $100 million inassumed net working capital, is seen as a positive for Calpine, furtheravailing its balance sheet to the commercial and industrial retail market, andgiving it some ability to weather weak gas prices with more stable cash flowsfrom retail sales.
Calpinesays the deal, expected to close by the end of the year, will benefit from some$200 million in synergies and runoff of legacy hedges, knocking the total pricetag to about $700 million.
Thefull and adjusted price tag puts the deal's premium between 5.0x and 6.5xEBITDA, according to a range of valuations offered by Citi Research, SunTrustRobinson Humphrey, Guggenheim Securities and Morningstar analysts on Oct. 10.Analysts viewed the multiple on the deal as appropriate for retail businessacquisitions.
Thelower end of the range, adjusting for the synergies, puts it just over thepremium it paid to purchase Champion Energy Marketing LLC in 2015 for $240 million,set at about 4.5x EBITDA., according to Morningstar analyst Andrew Bischof.
Giventhat this deal is nearly double the size of its purchase of Champion,Guggenheim analysts pointed out that the company would
stillbe have about 40% of its portfolio not matched to retail load.
"Calpine maintains an open position; assuming ~20% oftheir ~105 TWh volume is covered by their recently acquired Champion retailbusiness, and the Noble acquisition is twice as large, covering 40% of volume,40% of Calpine's volume would still be un-covered," Guggenheim analystShahriar Pourreza noted.
Financingfor the deal will come through a combination of cash, a $550 million bridgeloan — which the company says it will repay next year through asset salesaround the Mankato power plant — and cash from operations.
Thedecision to buy NAES is not without a thoughtful view on the marketer'sfootprint, meshing neatly across Calpine's merchant fleet across California,Texas and the Northeast, and further aligning with Champion's existing retailfootprint in the same markets, presumably where the bulk of synergies will beextracted.
"Whilewe would have preferred Calpine to focus on debt reduction, Calpine'smanagement has acquired a best-in-class energy retailer that has substantialoverlap with Calpine's existing generation footprint in California, Texas, andthe Northeast," Bischof said. "The acquisition provides a naturalhedge to Calpine's fleet in an environment of depressed power prices."
Despitethe added leverage, which comes when most merchant names are pledging todeleverage and refinance existing term debt, analysts view the transactionpositively, suggesting that the deal signals a foundational shift in themerchant power business model, wherein retail operations are critical toattracting and maintaining long-term investor interest in the stocks.
"Weincreasingly believe that a combined retail and wholesale platform is a goodlong-term business model for IPPs. While the immediate benefits include reducedvolatility, reduced value leakage through hedging and reduced need forcollateral, we think the bigger benefit is longer term," Citi analystPraful Mehta said.
"Thisincreasing retail presence could also help diversify and broaden Calpine'sinvestor base," Mehta added.
NAESis a Noble Americas Gas &Power Corp. subsidiary.