On December 18th Enel announced an agreement with EPH for the sale of its 66% stake in the Slovak subsidiary Slovenské Elektrárne. Discussions are still ongoing about the possible purchase of a 17% stake by the Slovak Government to maintain the control of the company, the first electricity producer and distributor in Slovakia.

Companies overview

ENEL is an Italian multinational producer and distributor of electricity and gas. The group, listed on the Milan Stock Exchange, is one of the largest corporation in Italy, with a market capitalization of approximately € 35 billion. Its controlling shareholder is the Italian Ministry of Economy and Finance. The group operates in 30 countries on 4 continents and with over 61 million users worldwide and 68,000 employees, Enel has the largest customer base among European competitors. The group is composed of many subsidiaries operating mainly in Italy, Spain, Russia, Argentina, Brazil, Chile and Peru and the consolidated revenues of Enel Group in 2014 exceeded € 73 billion.

ENERGETICKÝ A PRŮMYSLOVÝ HOLDING (EPH) is a leading Central European energy group operating mainly in the Czech Republic, Slovakia, Germany, Italy, Great Britain, Poland and Hungary. It is a vertically integrated energy utility covering the complete value chain in the energy sector. It includes more than 50 companies and 12,000 employees. EPH is the gas industry leader in Slovakia and the key shipper of natural gas from Russia to the European Union. EPH is one of the most important producers of cogenerated heat and the largest supplier of thermal energy in the Czech Republic. It is also the second largest Czech producer of electricity.

EPH shareholders are Daniel Křetínský, the chairman, and Patrik Tkáč, the owner of the Slovak financial conglomerate J&T Finance Group, and they collectively hold 66% of the voting rights. The rest is controlled by a J&T private equity fund.

Industry Overview

Slovenské Elektrárne A.S. is a utility company operating nuclear, hydroelectric, photovoltaic and fossil fuel power plants across Slovakia. The company operates mostly in the domestic market generating about 80% of the nation’s total electricity supply.

Slovakian electricity production is diversified across most sources, with a prominence in the use of fossil fuels and nuclear power. Energy sources in gross energy consumption in 2012 are composed by natural gas (26%), nuclear energy (24%), coal (21%), oil and renewable energy sources (20% and 9% respectively). These numbers are constantly evolving since the market share of renewables is increasing year on year.

Furthermore, since the Slovak Republic is a greenhouse gas intensive economy, it will try to comply with OECD regulations by cutting its CO2 emissions. In the country’s efforts, Nuclear and Renewable energy are going to play a crucial role.

On the other hand, after the Fukushima accident in 2011, there have been growing concerns over the production of Nuclear power. Furthermore, new regulatory pressures cause costs for Nuclear energy producers to rise. Decreasing demand and higher costs could therefore mitigate the positive effect of the shift towards clean power sources. In recent years, the electricity market is experiencing some turmoil. In 2014 we have seen a decreasing trend in general electricity prices with the Slovak wholesale price falling by 10%. The downfall in fuel prices together with a stagnant electricity demand and growing production from renewable sources pushed electricity prices down to a new low.

Despite adverse conditions, Slovenské Elektrárne kept up quality and volume of electricity production and supply, confirming its dominant position in the domestic market. Slovakia’s geographical position is strategic for energy import in the Balkans, a region with higher prices. SE is trying to increase the liquidity and transparency of the Slovak market in order to better exploit its leading position as a trader.

Drivers of the deal

One of the main drivers making the acquisition so important for EPH is that as a result the company will become the major energy player on the Slovakian market, holding a 49% stake in the Slovenské Elektrárne (in case the Slovak Government agrees to purchase a 17% stake from Enel). The Czech conglomerate will also add around 5,000 megawatts in hydropower, nuclear and thermal capacity to its assets. Consequently, it will also manage the gas distribution business, the main country gas transit pipeline, Eustream, a stake in one of three regional electricity distributors and it will hold interest in Slovakia’s company controlling for the production of the most country’s electricity.

In the last couple of years, the Czech company has shown a rapid growth, it has reached € 10.26 billion in assets in 2014 and became one of the central Europe’s biggest energy groups.

Due to a decrease in power prices below 30 euros per MWh, analysts view acquiring nuclear plant as risky since the prices are only a third of what would make new nuclear plants profitable. The uncertainties surrounding the completion of the new nuclear power plant of Mochavce and the difficult relations between Enel and the Slovakian Government, owner of the remaining 34%, on project delays are important drivers of the divestiture.

On the other hand, the Italian company, Enel Group, in 2013 has launched an asset sale to reduce its financial debt. The active portfolio management programme includes assets worth around € 6 billion with holdings from Romania and Slovakia, including the stake from Slovenské Elektrárne. The main goal of the program apart from reducing financial debt of Enel is to refocus its portfolio on emerging markets with higher growth.

Deal structure

The 66% share of Slovenské Elektrárne indirectly owned by Enel Produzione will be transferred to EPH (through EP Slovakia) in two phases, conditional on determined contingencies.

The first 33% of the company will be purchased by EP Slovakia in exchange for the payment of € 375 million to Enel in two tranches. The first € 150 million will be paid cash at the closing of the first phase, and the remaining € 225 million only at the closing of the second phase.
The second phase of the deal involves the sale of the remaining half of the participation and it is conditional both in terms of timing and in terms of value to the occurrence of determined events. The last 33% share owned by Enel is the underlying of a put option for Enel itself and of a call option assigned to EPH, both exercisable 12 months after the obtaining of the Trial Operation Permit for units 3 and 4 of the Mochovce nuclear power plant, currently under construction. The expected exercise date is in the first semester of 2019 but the options will be exercisable in any case at the “long stop date”, June 30th 2022. In exchange for the last 33% of Slovenské Elektrárne, EPH will pay € 375 million cash to Enel at the closing of the second phase.

As stated by the Slovak Government after the announcement of the deal, Enel is negotiating with them a memorandum to grant them an option to purchase 17% of Slovenské Elektrárne (in addition to the 34% currently owned) at the conclusion of phase two of the agreement with EPH. This would allow the Government to maintain 51% of the company and its control, leaving EPH with 49%. EPH has already reached similar agreement with the local government for the gas assets it purchased in the country.

The total value of the transaction (€ 750 million) will be adjusted at the closing of the second phase on the value calculated by independent experts on the conditions written in the agreement between Enel and EPH. The main determinants of the adjustments will be the net financial position of Slovenské Elektrárne, the price trend of electricity in the Slovakian market and the operating efficiency and enterprise value of units 3 and 4 of the Mochovce nuclear power plant.

The closing of the deal is subject to the authorization of the relevant Antitrust Authorities.

Due to the inclusion of the shares owned in Slovenské Elektrárne in Assets held for Sale by Enel, at the end of the first phase, it will be possible for the group to deconsolidate € 375 million of debt, that was one of the transaction drivers of the deal.

Advisors

EPH is advised by Citigroup Inc and Unicredit, while Slovenské Elektrárne is advised by Deutsche Bank. Allen & Overy acted as legal advisor for Slovenské Elektrárne.

To contact the authors:

Marcello Reccia marcello.reccia@studbocconi.it

Andrea Bertoni andrea.bertoni@studbocconi.it

Maxim Grama maxim.grama@studbocconi.it

Guglielmo De Martino guglielmo.demartino@studbocconi.it

Svyatoslav Novik svyatoslav.novik@studbocconi.it