By Deimante Chailenko, Matilda Oculy, Zahra Malik (University of Manchester) and Edvard Bruu, Knut Orneus (SSE)
Overview of the deal
Acquirer: National Grid
Target: Western Power Distribution
Total Transaction Size: £7.8bn
Announcement Date: 18 March 2021
Expected Close Date: Q3 2021
National Grid has announced that it will acquire Western Power Distribution (WPD) for £7.8bn from the American utility PPL Corporation. As part of the deal, National Grid agreed to sell off its Rhode Island gas and electricity business to PPL for £2.7bn, making the net investment £5.1bn for National Grid. This divestment was not originally planned but was instead necessary to finalize the WPD-deal. The acquisition of WPD is part of a larger strategic shift for National Grid, pivoting towards its electricity business at a time when investors are becoming increasingly sceptical of investments in gas. Post-transaction the electricity business unit will make up 70% of National Grid’s portfolio, which can be expected to increase even further as the company, in conjunction with the WPD-acquisition, announced its intentions to divest its entire UK gas transmission unit by 2022. While the WPD-deal makes strategic sense from this perspective, it also decreases National Grid’s geographical diversification, leaving the company more exposed to the increased regulatory scrutiny in the UK energy sector.
“These transactions will be transformational for our UK portfolio. The acquisition of WPD is a one-off opportunity to acquire a significant scale position in UK electricity distribution. WPD has a high quality, fast-growing asset base and an excellent track record of customer satisfaction, operational performance and financial returns.” - John Pettigrew, CEO (National Grid)
Company Details: (Acquirer - National Grid)
As one of the world’s largest publicly listed utilities, National Grid transmits and distributes electricity and natural gas to customers and communities in the UK and the Northeastern United States. The company has a primary listing on the London Stock Exchange and a secondary listing on the New York Stock Exchange.
Founded in 1990, headquartered in London, United Kingdom
CEO: John Pettigrew
Number of employees: 23,000+
Market Cap: £31.5bn (as of 13/04/2021)
LTM Revenue: £14.8bn
LTM EBITDA: £4.7bn
LTM EV/Revenue: 4.2x
LTM EV/EBITDA: 12.9x
Company Details: (Target - Western Power Distribution)
Founded in 1999, Western Power Distribution is a subsidiary of PPL Corporation, a US energy company. WPD provides electricity to 7.9 million customers in the Midlands, Southwest, and Wales, securing its position as the largest electricity distribution company in the UK.
Founded in 1999, headquartered in Bristol, United Kingdom
CEO: Philip Swift
Number of employees: 6,500
LTM Revenue: £1.7bn
LTM EBITDA: £1.3bn
Net Income: £549m
RAV: £8.0bn (Regulatory Asset Value)
Projections and Assumptions
With the completion of the two deals, National Grid will secure a significant position in electricity distribution. Through the acquisition of WPD, the UK’s largest electricity distribution business, the group will gain 7.9 million new electricity customers and the proportion of the company’s electricity assets will increase from around 60 percent to 70 percent which highlights a significant step in the intended shift from fossil fuels usage. National Grid expects to maintain its geographic and regulatory diversity with about 40 percent exposure to the US.
According to John Pettigrew, CEO of National Grid, the acquisition of WPD, as well as the proposed sale of NECO, should generate attractive shareholder value. The coming transactions are expected to be significantly earnings accretive from year one and in the longer term, which will generate a return above the company’s cost of capital. Also, while expecting to maintain the current investment-grade rating, the transactions will support National Grid’s asset growth target of five to seven percent.
National Grid expects the completion of the WPD transaction within the next four months. The gas sale is expected to generate strong interest and will be launched in the second half of this year, it is expected to be completed approximately a year later.
The acquisition of WPD will strengthen National Grid’s long-term growth outlook by ensuring a significant scale position in electricity distribution. This is an advantage as the global energy landscape is changing. There is an increase in renewable generation, growth in electric vehicle penetration and new electric heating solutions for homes, offices and buildings. Thus electricity demand is forecasted to double by 2050 and the National Grid is positioned to play a pivotal role to enable this growing role of electricity.
As well as this, the transaction will help National Grid to deliver net zero through a shared vision and initiatives to reduce emissions. WPD and National Grid are aiming to deliver net zero emissions by 2050. One strategy to work towards this goal is via electric vehicle charging infrastructure. On a national scale, this will involve a £950m Rapid Charging Fund.
Along with this acquisition, National Grid is selling its subsidiary The Narragansett Electric Company, which serves electricity and natural gas, to PPL Corporation. Hence, National Grid pursues the shift in the energy transition from fossil fuel towards electrical power, following its vision “to be at the heart of a clean, fair and affordable energy future”.
Risks and Uncertainties
The main uncertainty with regards to this deal is linked to its approval, as the Western Power Distribution acquisition is a Class 1 transaction under the Listing Rules. Therefore, for the deal to take place, National Grid requires prior approval from its shareholders in a general meeting. In order to achieve this, National Grid will publish a shareholder circular to provide further information about the proposed deal before the General Meeting which will be held at the end of April this year.
Furthermore, the company must get regulatory approvals for the deal to go through and its sale of The Narragansett Electric Company is a prerequisite to the completion of the deal. Hence, uncertainties regarding the sale of NECO are additional risk factors to the Western Power Distribution deal.
A bridge facility was put in place to fully cover the WPD purchase, which will be repaid via the proceeds from Rhode Island and UK Gas Transmission businesses. However, the Rhode Island transaction will also be subject to regulatory approvals and is expected to complete in the first quarter of 2022. Any regulatory obstacles could curtail National Grid’s ability to repay this bridge facility.
As National Grid would considerably expand its market share in the electricity sector, this would further increase the attention it receives from regulatory authorities. UK regulator Ofgem published plans to cut baseline annual rates of return for local electricity grid companies (including WPD) to 4.4% for five years from 2023, down from about 7%. This is due to their effectively monopoly power and issues regarding competition law.
“In combination with the continued successful execution of our strategy in the US, establishing National Grid as the leading electricity transmission and distribution operator in the UK will strengthen our long-term growth prospects, enhance our role in the UK’s energy transition and drive long-term shareholder value.” - John Pettigrew, CEO (National Grid)