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Total to take majority stake in French electricity supplier Direct Energie

Highlights


New move by French oil major into downstream power, gas

Total eyes 7 million customers by 2022 in France, Belgium

As Italy's Eni also reaffirms 'green' energy commitment

London — French major Total agreed Wednesday to take a 74.3% stake in French electricity and gas supplier Direct Energie as it looks to expand its focus on low-carbon energies and to accelerate its downstream ambitions in France and Belgium.

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The Eur1.4 billion ($1.7 billion) acquisition also continues the recent trend of diversification by Europe's oil and gas majors into energy retail, electric utilities, gas-fired generation, renewables and sustainable fuels.

Shell in December announced the acquisition of UK power supplier First Utility and Italy's Eni has also pledged significant investment in green initiatives in its home market.

For Total, the deal is part of its shift in strategy that began in early 2016 with the creation of a new Gas, Renewables and Power in part designed to prepare the transition toward a lower-carbon future.

"This takeover is part of the group's strategy to expand along the entire gas-electricity value chain and to develop low-carbon energies, in line with our ambition to become the responsible energy major," Total CEO Patrick Pouyanne said in a statement.

"Through this transaction, Total is actively pursuing its development in electricity and gas generation and distribution in France and Belgium," Pouyanne said.

The deal follows a move by Total in October last year to expand its presence in France's residential gas and power distribution market with the introduction of Total Spring, a gas and green power offering.



It also comes on the heels of Total's takeover of Belgian gas and green power supplier Lampiris in 2016, the acquisition the same year of France-based battery manufacturer Saft, and the purchase of a 23% stake in wind, solar and hydro power generator EREN in October last year.

Total said Wednesday it had agreed the deal with Direct Energie's controlling shareholders to buy the stake at Eur42 ($52) per share, representing a 30% premium on the supplier's closing share price Tuesday.

Direct Energie has 2.6 million customers while Total has 1.5 million.

Total said it was targeting 6 million French customers and over 1 million Belgian customers by 2022.

Direct Energie has 1.35 GW of generation capacity (800 MW gas, 550 MW renewables) with a 2 GW renewable energy pipeline in France, plus a 400 MW gas plant under construction at Landivisiau, Brittany, Total said.

Total currently has 900 MW of installed capacity, but aims to increase it to 10 GW within five years following the investment, "either in the form of gas-fired power plants or in the form of renewable electricity capacities," it said.


VERTICAL INTEGRATION


Analysts said Wednesday the Total deal was part of a growing trend of oil majors looking to invest in the electricity sector.

"With virtually no one building large-scale oil, coal or gas power plants in Europe at the moment, the majors may feel an increased level of vertical integration through electricity acquisitions is the best way of securing long term demand for their output," Glenn Rickson, head of power analysis at S&P Global Platts Analytics, said.

Royal Bank of Canada analysts said the Direct Energie deal looked "opportunistic."

"The push to grow along the electricity value chain is in line with Total's stated strategy, although we did not expect something this significant so soon," they said.

"At this stage it remains unclear what synergies the two portfolios could generate, but the headline acquisition multiple looks high versus utility peers," they added.

Total said the offer valued Direct Energie at approximately 12.5 times its 2018 projected EBITDA.

"Total's acquisition of Direct Energie shows that the company is serious about its ambition to build value across the electricity value chain, with both gas and renewables playing a key role," Valentina Kretzschmar, research director at consultancy Wood Mackenzie, said.

"Total was already ahead of its peers in terms of the M&A spend on renewables and other clean technologies, which included Saft, Lampiris and EREN," Kretzschmar said.

The head of Total's gas, renewables and power division, Philippe Sauquet, told S&P Global Platts in an interview in February the company wanted to raise its gas-fired power generation capacity and renewables presence in Europe, saying it was "important for us to be present all along the gas chain, all the way down to the electricity end-user."

Total already has a number of power generation assets, including co-generation plants in France and Belgium close to its refining operations, but the company sees a bright future for gas and renewables to work in tandem across Europe.


ENI STRATEGY


While Total was announcing its latest downstream expansion, its Italian peer Eni reaffirmed Wednesday its commitment to green energy.

Updating the Italian financial community of Eni's strategic plan for 2018-2021, CEO Claudio Descalzi said the company had earmarked "significant investments" in green activities under development in Italy.

"We are planning to invest Eur7 billion over the next four years [in Italy], of which Eur1 billion has been earmarked for green activities, including research and development expenditure for the decarbonisation process," Descalzi said.

He said that as part of Eni's "Progetto Italia" initiative -- an industrial requalification program to produce renewable energy at some of Eni's reclaimed industrial sites in Italy -- the company has identified 25 projects with a total potential capacity of 220 MW to come online by 2021.

Descalzi said Eni would concentrate research into renewables mainly in the solar power, energy storage, advanced biofuels, biomass and wind power sectors.

--Stuart Elliott, Stuart.Elliott@spglobal.com
--Henry Edwardes-Evans, henry.edwardes-evans@spglobal.com
--Edited by Jeremy Lovell, newsdesk@spglobal.com