Overview of the deal
Estimated value: $9.7bn
Announcement date: 7/11/2017
Acquirer Advisors: Barclays, Perella Weinberg Partners
Target Advisors: Goldman Sachs
It was first announced in September 2017 that Fortum had positioned itself to buy E.ON’s 46.65% stake in Uniper, and in November they launched a public takeover. The deal can be seen as having aspects of both horizontal integration and diversification in that Fortum will absorb Uniper’s current customers in the electricity market while also adding fossil fuel as a new source of its energy production.
The proceedings following Fortum’s announcement have been difficult. Already in September Uniper rejected Fortum buying E.ON’s stake, underlining the deal as a hostile takeover in the public narrative, and offering higher dividends in an attempt to retain shareholders. By February Fortum’s tender bid expired with only 47.12% of shareholders (including E.ON) having tendered their shares. Fortum has stated their commitment to not increase their cash tender offer at $27.1 per share, and expects the bid to close by mid-2018.
The picture is further complicated by activist investors Elliott Management and Knight Vinke having both taken stakes in Uniper, counting for 7.4% and 5.02% respectively. Both oppose the takeover.
ModernPowerSystems emphasises the criticism that this deal faces from Finnish policy makers because of its contradictory notion to Fortum’s efforts to establish itself as a forerunner in clean energy.
Company details (Fortum)
Fortum is a Finnish energy company offering energy production and heating to Europe. It is a major player in the Nordics but also operates in the Baltics, Poland, and Russia. Its products and aim revolves around clean energy and innovative solutions such as waste-to-energy products.
- Founded in 1998, headquartered in Helsinki, Finland
- President and CEO: Pekka Lundmark
- Number of employees: 8,785
- Market Cap: $19.1bn - EV: $21.3BN
- LTM Revenue: $5.64bn - LTM EBITDA: $1.57bn
- LTM EV/Revenue: 3.79x - LTM EV/EBITDA: 13.58x
Company details (Uniper)
Uniper is a german fossil energy producer and provider operation broadly in Europe. It was created through its parent company’s, the energy giant E.ON’s, decision to split its fossil fuel assets into a separate legal entity.
- Founded in 2016, headquartered in Düsseldorf, Germany
- President and CEO: Klaus Schäfer
- Number of employees: 13,000
- Market Cap: $11.0bn - EV: $12.1bn
- LTM Revenue: $89.3bn - LTM EBITDA: $2.00bn
- LTM EV/Revenue: 0.14x - LTM EV/EBITDA: 6.02x
Projections and assumptions
The outcome of this deal, provided that it goes through, are highly dependent on Fortum’s strategy. From a pure market power standpoint the combined entity would have a European market share of 10% as well as shared interests in Russia. Uniper’s reaction however lies in a concern that Fortum may plan to dismantle the coal-focused part of Uniper’s business and only retain its minority hydro- and nuclear power assets. Lundmark (Fortnum CEO) has been quoted saying that “coal is the greatest climate sinner” and that he has “no problem with a premature coal exit in germany”. The company is already facing plans for a rapid phase-out of fossil fuels from the German governments.
However, there is short-term strategic importance in keeping Uniper wholly intact. Falling European fossil energy productions has led to an increased demand in the market, often filled by energy imported from Russia, a trend which is supported by the highly fluctuating output from wind- and hydro-plants. In the short-term, Uniper’s fossil fuel complements Fortum’s clean energy mission by enabling them to domesticate this import demand. It allows them to tap into a very lucrative market. In fact, Fortum highlights Uniper as “highly cash generative” and reasons that the acquisitions will “support the company in accelerating the development and implementation of sustainable energy technologies, without sacrificing a competitive dividend”. So while the outcome is uncertain the acquisition would provide an attractively high short-term return while Europe exits fossil energy.
Fortum is widely recognised, through reputation and activity, as being a pioneering clean technology energy provider. This deal however strikes, on the surface, a contradiction to this strategy because of Uniper’s distinct emphasis in fossil energy provision. However if Fortum can, as they have said they seek to, use Uniper’s reliable fossil fuel infrastructure to smooth the transition towards cleaner energy then we could be seeing the beginning of a European powerhouse for clean, reliable energy provision.
This acquisition is also an opportunity for fortum to further their clean energy product line with Uniper’s hydro and nuclear assets. This is all part of their capital deployment strategy to further their revenues, and we see this as especially important for their customer solution segment which currently yields 65% of Fortum’s revenue because a shift towards demanding clean energy is a trend emerging in the retail energy business.
Over a 2-5 year horizon, if integrated correctly by increasing reliability and keeping prices as low as possible during any transition period, this increased focus on clean energy will increase the customer base in Europe. To emphasise the importance of pioneering clean energy we just have to look at some achievements in Europe over the last couple of years E.G. In 2017, the world’s fourth largest economy, Germany, produced a record 36.1% of its total power needs with renewable sources.
Risks and uncertainties
There is uncertainty regarding Fortum’s strategy. At the moment they are considered to largely be focused on low-carbon assets (Clean technologies) and so seeking to expand their existing product line could mean only utilising the hydro and nuclear assets of Uniper. However, Fortum have come out to argue that “conventional energy production is still required to ensure affordable energy security in Europe” which counters this risk. However, many Fortum shareholders, including a plethora of socially responsible investors, have voiced their concerns about what this means for the company’s operating carbon footprint. A mismanagement of this situation could see a loss of confidence by existing shareholders and hostility from the board of directors moving forward. This becomes especially troublesome as Fortum has publicly announced that it will be looking to spend their leftover cash from this acquisition (Fortum allocated $10bn, cash from the sale of its Distribution Networks in 2015, for a 100% stake in Uniper but have been left with over half unspent as they failed to buy no more than a 47% stake in Uniper) on other targets such as district heating providers.
Moreover, securing regulatory approval in Russia could be challenging because of Russian law that prevents foreign state-owned entities from gaining control over strategic assets. So, approval rests on if Russia decides Uniper operated gas- and coal-fired power plants are strategic assets (Do note that these Uniper owned plants provide about 5% of Russia’s total energy needs so this is very possible). Regional regulatory approval is vital for this deal as for Fortum, currently, Russia makes up 24% of total sales and they will only be looking to expand this as they acquire Uniper’s 5 power plants situated in Russia.
The impact of financing on the leverage of Fortum - net debt to EBITDA - will rise above 2.5x, which could yield problems quickly if new debt needs to be issued for further planned acquisitions and clean energy expansion. But this concern in partly countered by the expectation that Uniper will bring highly cash generative business which will be channelled to reduce this liability in the short to medium-term.
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