By Rhys Meredith, Kian Patel, Oliver Platts, Velizar Zlatev and Salah Baaziz (University of Bristol), Jia Jian Gan, Kaylo Ho and Michele Silvestri (LSE)
Photo: Nikola Johnny Mirkovic (Unsplash)
Overview of the deal
Acquirer: Brookfield Super-Core Infrastructure Partners
Target: FirstEnergy Transmission, LLC (FET)
Total Transaction Size: $3.5bn
Announced date: February 2, 2023
Expected close date: Early 2024
Target advisors: Skadden, Arps, Slate, Meagher & Flom (Legal)
Acquirer advisors: J.P. Morgan, Citi and Moelis & Company (Financial), Jones Day (Legal)
Brookfield Super-Core Infrastructure Partners (Brookfield) has agreed to acquire an additional 30% ownership interest in FirstEnergy Transmission, LLC (FET) for $3.5 billion, according to an announcement made by FirstEnergy Corp. The purchase of the additional stake in FET by Brookfield is in line with its strategy of investing in high-quality, resilient businesses that combine growth and defensive characteristics to generate stable cash flows across market cycles.
Upon completion of the transaction, FirstEnergy will remain the majority owner of FET. The $3.5 billion all-cash deal is expected to close by early 2024, subject to regulatory approvals and clearances. The transaction will enable FirstEnergy to further enhance its financial position and support its goal to be a premier utility with sustainable, long-term growth as it enables the clean energy transition. The proceeds from the sale will be used to accelerate improvements in the company's credit profile as it targets a funds-from-operations to debt ratio of 14-15%, consistent with strong investment-grade companies.
With this acquisition, Brookfield is continuing to expand its infrastructure investment portfolio, which includes utilities, energy, transport, and data infrastructure. It manages over $600 billion in assets across real estate, infrastructure, renewable power, and private equity. Brookfield is one of the world's largest infrastructure investors and has a proven track record of investing in high-quality, resilient businesses that combine growth and defensive characteristics to generate stable cash flows across market cycles.
“This is a very attractive opportunity that firmly aligns with BSIP's strategy of investing in high quality, resilient businesses that combine growth and defensive characteristics to generate stable cash flows across market cycles.” - Eduardo Salgado, Managing Partner in Brookfield's Infrastructure Group and head of Brookfield Super-Core Infrastructure Partners (BSIP)
Company Details (Acquirer - Brookfield Infrastructure Partners)
Brookfield Infrastructure Partners L.P. is a publicly traded limited partnership and subsidiary of Brookfield Asset Management. It spans across North and South America, Europe and Asia-Pacific with a diverse portfolio of infrastructure assets across sectors such as utilities, transport, energy, and communications. The company manages a range of funds, including the Brookfield Super-Core Infrastructure fund, and prioritises investments in high-quality, long-life assets with strong competitive positions and stable cash flows. Recent developments include Brazilian Electricity Transmission, with an IRR of over 22%.
Founded in 2007, headquartered in Hamilton, Bermuda
CEO: Sam Pollock
Number of employees: 52,000
Market Cap: $15.5bn (as of 10/04/2023)
EV: $66.9bn (as of 10/04/2023)
LTM Revenue: $14.4bn
LTM EBITDA: $5.64bn
LTM EV/Revenue: 4.6x
LTM EV/EBITDA: 11.9x
Company Details (Target - FirstEnergy Transmission)
FirstEnergy Corp (NYSE: FE) is an electric utility whose subsidiaries and affiliates are involved in the generation, transmission and distribution of electricity, as well as energy management and other energy-related services. Serving 6 million customers across 7 states in the USA, its 10 electric utility operating companies comprise one of the United States’ largest investor-owned electric systems. Owing to a surge in demand for advanced technologies, smart cities and electric mobility, the electric utilities industry is currently in the midst of rapid change. In order to utilise renewable energy sources and achieve sustainability, companies within the industry must strive to develop intelligent solutions and energy efficiency in their own operations, whilst also ensuring safe and secure infrastructure for the environment today and into the future.
FirstEnergy’s 10 regulated distribution companies operate a vast infrastructure of more than 269,000 miles of distribution lines and are dedicated to providing customers with safe, reliable and responsive service. Through its “Energizing the Future” transmission project, FirstEnergy aims to upgrade many of its existing transmission facilities with advanced equipment and technologies that reinforce the power grid and help prevent and reduce the duration of customer outages. Since 2014, it has upgraded or replaced existing power lines, incorporated new smart technology into the grid and upgraded dozens of substations with new equipment and enhanced security features with further planned investments of up to $7bn in order to advance this project further.
In 2021, FirstEnergy was fined $230mil by the U.S. Attorney for the Southern District of Ohio for its involvement in the Ohio Nuclear Bribery Scandal where it was accused of having paid roughly $60mil to Generation Now in exchange for passing a $1.3bn bailout for its nuclear power operations. When news of this scandal broke out, its stock price plummeted within hours.
Founded in 1997, headquartered in Akron, Ohio (USA)
CEO: John W. Somerhalder II
Number of employees: 12,395
Market Cap: $23.8bn (as of 10/04/2023)
EV: $43.8bn (as of 10/04/2023)
LTM Revenue: $12.5bn
LTM EBITDA: $3.2bn
LTM EV/Revenue: 3.5x
LTM EV/EBITDA: 13.7x
Projections and Assumptions
Short-term consequences
Brookfield's expertise in managing infrastructure assets, particularly in the electricity transmission sector, has been demonstrated in its recent acquisitions of American Electric Power's transmission business in 2021 for $2.15bn and Transelec, Chile's largest electricity transmission company, in 2020 for $1.3bn. These acquisitions have allowed Brookfield to expand its portfolio of high-quality infrastructure assets and generate stable, long-term cash flows while providing operational efficiencies.
With Brookfield's investment in FirstEnergy, the utility company can benefit from the private equity firm's operational expertise, which will provide valuable insights and strategies to improve its operational efficiency. Brookfield's track record of reducing costs, streamlining operations, and enhancing efficiency will help FirstEnergy identify opportunities to optimize its existing operations, reduce expenses, and improve profitability.
Brookfield could also help FirstEnergy identify new revenue streams and explore new business models that can help drive short-term growth. The investment can also bring in new management expertise, which could help FirstEnergy better manage and optimize its own asset portfolio.
However, there is one short-term risk that outshines the rest by far. This is the current economic and environmental climate. The current “recessionary” like period could have a significant impact on FirstEnergy's financials, including its revenue and earnings. Any short-term financial impact could lead to uncertainty and volatility for shareholders and investors.
Additionally, with the energy crisis we have seen recently, investments in FirstEnergy might fall short of anticipated amounts as executives look at energy options that are available currently. Although these are both fairly muted risks, these are arguably some of the short-term risks that both firms need to keep in mind.
Long-term Upsides
First and foremost, this transaction allows FirstEnergy to enhance its financial position by injecting a substantial amount of equity capital into the company. The $3.5 billion proceeds from the stake sale provide FirstEnergy with increased liquidity and financial flexibility to pursue its strategic growth initiatives and reduce debt. This equity infusion strengthens FirstEnergy's balance sheet positioning the company for sustainable long-term growth.
Additionally, the deal with Brookfield brings a strategic partner on board with extensive experience in the energy and infrastructure sectors. Brookfield's expertise and resources can support FirstEnergy's transmission business in accelerating its growth and considerably expanding its operations. This partnership presents potential synergies in terms of shared knowledge, best practices, and access to new verticals, enhancing FirstEnergy's competitive position in the industry.
Furthermore, this transaction introduces a long-term earnings growth rate of 6-8% for FirstEnergy, which indicates the positive outlook for the company's financial performance. The deal aligns with FirstEnergy's strategic focus on transmission and distribution businesses, which are considered more stable and predictable compared to other segments of the energy sector, providing a more reliable and steady cash-flows for the company.
Overall, the equity capital agreement with Brookfield represents a transformative move for FirstEnergy, providing immediate financial benefits, strategic advantages, and long-term growth prospects. The transaction demonstrates FirstEnergy's commitment to improving its financial position, unlocking shareholder value, and positioning itself for sustained success in the evolving energy landscape.
Risks and Uncertainties
FirstEnergy’s business is subject to several risks that could impact its financial performance. The energy industry is heavily regulated, and changes in regulations could make it more expensive for FirstEnergy to generate electricity. Additionally, FirstEnergy’s operations are located in areas that are prone to natural disasters, such as hurricanes and earthquakes. These disasters could disrupt FirstEnergy’s operations and damage its infrastructure. The price of energy is volatile, and changes in energy prices could also impact FirstEnergy’s financial performance.
Furthermore, FirstEnergy faces competition from other energy companies, such as solar and wind power companies. These companies are becoming increasingly competitive, and they could take market share away from FirstEnergy. Finally, the global economy is interconnected, and changes in the global economy could impact FirstEnergy’s business. For example, if there were to be a recession in the United States, it could lead to a decrease in demand for energy, which would impact FirstEnergy’s financial performance.
“This agreement efficiently raises capital at an attractive valuation and speaks to the strength and potential of our regulated growth strategies. It positions FirstEnergy to drive value for shareholders as we further optimize our financial position and plan for additional smart grid and clean energy investments in our regulated transmission and distribution businesses.” - John W. Somerhalder, Interim President and CEO (FirstEnergy)
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