European Event-Driven Analyst

Jesus Rodriguez Aguilar

Event-Driven

<ul>
<li>
<a href="https://www.smartkarma.com/entities/naturgy-energy-group-sa" target="_blank" data-smartkarma-citation="entities:21271:1" rel="noopener">Naturgy Energy Group SA (NTGY SM)</a> surprised the market by announcing its division into two listed companies: one for regulated network assets, and the other for liberalised businesses (generation &amp; commercialisation/marketing).</li>
<li>Naturgy is trading at 10.1x EV/2021a EBITDA and at a demanding 21.9x P/E, higher than Iberdrola SA (IBE SM)'s 16.3x and Endesa SA (ELE SM)'s 11.5x.</li>
<li>Strategies: pair trades long REE SM/short NTGY SM or long ENG SM/short NTGY SM. Risk: this strategy assumes that both CriteriaCaixa and IFM will stop acquiring shares of Naturgy.</li>
</ul>



Naturgy Energy Group SA (NTGY SM) surprised the market by announcing its division into two listed companies: one for regulated network assets, and the other for liberalised businesses (generation &amp; commercialisation/marketing).
Naturgy is trading at 10.1x EV/2021a EBITDA and at a demanding 21.9x P/E, higher than Iberdrola SA (IBE SM)'s 16.3x and Endesa SA (ELE SM)'s 11.5x.
Strategies: pair trades long REE SM/short NTGY SM or long ENG SM/short NTGY SM. Risk: this strategy assumes that both CriteriaCaixa and IFM will stop acquiring shares of Naturgy.


<ul>
<li>The deal did not pass muster with the New Mexico PRC (the last hurdle) but still is strategic for Iberdrola, hence the longstop date os extended to 20 April 2023.</li>
<li>There should be higher chances to obtain the green light. On a standalone basis, my TP for PNM is $50.47/share. Gross spread is 9.2%, with likely a year to closing. </li>
<li>Recommendation is Long PNM US, underpinned by stand-alone comparables based valuation and a 2.9% dividend yield. There is the possibility of further upside coming from a sweetening of the offer price.</li>
</ul>


The deal did not pass muster with the New Mexico PRC (the last hurdle) but still is strategic for Iberdrola, hence the longstop date os extended to 20 April 2023.
There should be higher chances to obtain the green light. On a standalone basis, my TP for PNM is $50.47/share. Gross spread is 9.2%, with likely a year to closing. 
Recommendation is Long PNM US, underpinned by stand-alone comparables based valuation and a 2.9% dividend yield. There is the possibility of further upside coming from a sweetening of the offer price.


Iberdrola/PNM Resources: Longstop Date Extension

<ul>
<li>The New Mexico Public Regulatory Commission voted unanimously in favor of rejecting the acquisition of <a href="https://www.smartkarma.com/entities/pnm-resources-inc" target="_blank" data-smartkarma-citation="entities:16546:1" rel="noopener">PNM Resources (PNM US)</a> by <a href="https://www.smartkarma.com/entities/avangrid-inc" target="_blank" data-smartkarma-citation="entities:26503:1" rel="noopener">Avangrid Inc (AGR US)</a>, a subsidiary of <a href="https://www.smartkarma.com/entities/iberdrola-sa" target="_blank" data-smartkarma-citation="entities:21276:1" rel="noopener">Iberdrola SA (IBE SM)</a>.</li>
<li>Iberdrola could appeal to the New Mexico Supreme Court, although this process could take a long time or work towards obtaining approval from the PRC.</li>
<li>The operation enters an uncertain situation, with a very high probability that it will finally not materialise. Median implied valuation of PNM Resources (comparables EV/Fwd EBITDA based) is $50.14/share. Expect short-term share price weakness.</li>
</ul>


The New Mexico Public Regulatory Commission voted unanimously in favor of rejecting the acquisition of PNM Resources (PNM US) by Avangrid Inc (AGR US), a subsidiary of Iberdrola SA (IBE SM).
Iberdrola could appeal to the New Mexico Supreme Court, although this process could take a long time or work towards obtaining approval from the PRC.
The operation enters an uncertain situation, with a very high probability that it will finally not materialise. Median implied valuation of PNM Resources (comparables EV/Fwd EBITDA based) is $50.14/share. Expect short-term share price weakness.


Iberdrola/PNM Resources: PRC Vetoes the Purchase of PNM

<ul>
<li>
Deals in the regulated power industry have longer closing times (and higher spreads) than those of other sectors.  On 2 November, Ashley Schannauer, the hearing examiner for the New Mexico Public Regulation Commission in charge of the merger application, recommended against the proposed $4.3 billion merger between <a href="https://www.smartkarma.com/entities/avangrid-inc" target="_blank" data-smartkarma-citation="entities:26503:1" rel="noopener">Avangrid Inc (AGR US)</a>, an affiliate of <a href="https://www.smartkarma.com/entities/iberdrola-sa" target="_blank" data-smartkarma-citation="entities:21276:1" rel="noopener">Iberdrola SA (IBE SM)</a>, and <a href="https://www.smartkarma.com/entities/pnm-resources-inc" target="_blank" data-smartkarma-citation="entities:16546:1" rel="noopener">PNM Resources (PNM US)</a>, saying its potential harms outweigh benefits to the public. Investors are getting nervous on the stumbling block of Mr. Schannauer's 447-page report.
</li>
<li>
Parties have until 12 November to file responses to the hearing examiner's report, after which commissioners could hold a hearing or vote on the proposal. If the merger is rejected by the commission, the company could submit a revised proposal. Also, the commission’s decision can be appealed to the New Mexico Supreme Court.
</li>
<li>
The median implied valuation of PNM Resources (comparables EV/Fwd EBITDA based, source Capital IQ consensus) is $50.14/share.
</li>
<li>
The main hurdle to completing this deal is New Mexico regulatory approval. Nevertheless, my understanding, after conversations with Iberdrola's IR and considering the stance of Public Regulation Commission staff, is that the deal should complete, although it may take longer than the initial "October to December 2021" deadline. My TP for PNM is $50.3/share. Investors have made some money on this deal, several times (as can be seen in the chart in the insight). Gross spread as of 3 November is 5.3%. Recommendation is long PNM US, underpinned by stand-alone comparables-based valuation.
</li>
</ul>



Deals in the regulated power industry have longer closing times (and higher spreads) than those of other sectors.  On 2 November, Ashley Schannauer, the hearing examiner for the New Mexico Public Regulation Commission in charge of the merger application, recommended against the proposed $4.3 billion merger between Avangrid Inc (AGR US), an affiliate of Iberdrola SA (IBE SM), and PNM Resources (PNM US), saying its potential harms outweigh benefits to the public. Investors are getting nervous on the stumbling block of Mr. Schannauer's 447-page report.


Parties have until 12 November to file responses to the hearing examiner's report, after which commissioners could hold a hearing or vote on the proposal. If the merger is rejected by the commission, the company could submit a revised proposal. Also, the commission’s decision can be appealed to the New Mexico Supreme Court.


The median implied valuation of PNM Resources (comparables EV/Fwd EBITDA based, source Capital IQ consensus) is $50.14/share.


The main hurdle to completing this deal is New Mexico regulatory approval. Nevertheless, my understanding, after conversations with Iberdrola's IR and considering the stance of Public Regulation Commission staff, is that the deal should complete, although it may take longer than the initial "October to December 2021" deadline. My TP for PNM is $50.3/share. Investors have made some money on this deal, several times (as can be seen in the chart in the insight). Gross spread as of 3 November is 5.3%. Recommendation is long PNM US, underpinned by stand-alone comparables-based valuation.



Hearing Examiner Recommends Against Iberdrola (Avangrid)/PNM Resources Deal

There have been some important regulatory changes included in the royal decree issued last week, as the Spanish Government uses demagogy and asks for a "social contribution" from utilities to compensate households from the escalation in amount of the electricity bill in Spain.
The negative impact of those regulatory changes on <a href="https://www.smartkarma.com/entities/naturgy-energy-group-sa" target="_blank" data-smartkarma-citation="entities:21271:1" rel="noopener">Naturgy Energy Group SA (NTGY SM)</a>'s income is estimated at around €350 mn, equivalent to 9.2% of 2021e EBITDA and 15.5% of net profit. Nevertheless, the takeover offer has supported Naturgy's share price, in contrast to the strong cuts suffered by <a href="https://www.smartkarma.com/entities/endesa-sa" target="_blank" data-smartkarma-citation="entities:21264:1" rel="noopener">Endesa SA (ELE SM)</a> (-11% in four days) and <a href="https://www.smartkarma.com/entities/iberdrola-sa" target="_blank" data-smartkarma-citation="entities:21276:1" rel="noopener">Iberdrola SA (IBE SM)</a> (-8.8%). See charts in the Insight.
The Board of <a href="https://www.smartkarma.com/entities/naturgy-energy-group-sa" target="_blank" data-smartkarma-citation="entities:21271:1" rel="noopener">Naturgy Energy Group SA (NTGY SM)</a> considers the consideration offered by IFM as "fair", but highlights that the top shareholders will not tender their shares, neither will the Board members, nor will the treasury shares or those held for management compensation be tendered. The Board does not make any recommendation to shareholders to tender. The Board also underlines the negative impact of the takeover bid on the company's corporate governance. The Board thus throws the gauntlet at IFM.
There are four possible bid outcome scenarios:
<ol class="">
<li>
IFM withdraws the bid prior to the end of the offer period "when, due to exceptional circumstances" as per art. 33, sec C of the Takeover Code. The current energy reform undertaken by the Government could support this claim. Probability is very low.</li>
<li>
IFM does not reach the 17% minimum acceptances threshold (although it could hypothetically agree to a 10% threshold) and withdraws the bid. Share price would likely fall.</li>
<li>
IFM achieves its objective without improving the current offer price. The gain is small: gross spread is 2.7%, but there is the risk of apportionment (25% of the share capital could potentially tender), and the share price post-bid could be negatively affected by lack of liquidity. Governmental intervention in the energy market constitutes a good argument for the bidder not to sweeten the offer and also an incentive to tender, in anticipation of a downward adjustment of the post-takeover share price.</li>
<li>
IFM improves the offer. In this case, I do not think that the improvement would be very significant (less than 5%) with a low probability, in my view.</li>
</ol>
I do not see an interesting option holding the shares until the end of the acceptance period (8 October), considering the risks. It could potentially be interesting to stay up to five calendar days before the end of the acceptance period (2 October), in case there is an improvement in IFM's offer during this period and sell upon the news. The option of holding the shares and not tendering them entails a risk of illiquidity (the free-float could be greatly reduced) and the potential for revaluation in the medium term is not excessively attractive (median TP on Capital IQ consensus is €22.37), albeit the dividend yield is c. 5.6%.

There have been some important regulatory changes included in the royal decree issued last week, as the Spanish Government uses demagogy and asks for a "social contribution" from utilities to compensate households from the escalation in amount of the electricity bill in Spain.
The negative impact of those regulatory changes on Naturgy Energy Group SA (NTGY SM)'s income is estimated at around €350 mn, equivalent to 9.2% of 2021e EBITDA and 15.5% of net profit. Nevertheless, the takeover offer has supported Naturgy's share price, in contrast to the strong cuts suffered by Endesa SA (ELE SM) (-11% in four days) and Iberdrola SA (IBE SM) (-8.8%). See charts in the Insight.
The Board of Naturgy Energy Group SA (NTGY SM) considers the consideration offered by IFM as "fair", but highlights that the top shareholders will not tender their shares, neither will the Board members, nor will the treasury shares or those held for management compensation be tendered. The Board does not make any recommendation to shareholders to tender. The Board also underlines the negative impact of the takeover bid on the company's corporate governance. The Board thus throws the gauntlet at IFM.
There are four possible bid outcome scenarios:


IFM withdraws the bid prior to the end of the offer period "when, due to exceptional circumstances" as per art. 33, sec C of the Takeover Code. The current energy reform undertaken by the Government could support this claim. Probability is very low.

IFM does not reach the 17% minimum acceptances threshold (although it could hypothetically agree to a 10% threshold) and withdraws the bid. Share price would likely fall.

IFM achieves its objective without improving the current offer price. The gain is small: gross spread is 2.7%, but there is the risk of apportionment (25% of the share capital could potentially tender), and the share price post-bid could be negatively affected by lack of liquidity. Governmental intervention in the energy market constitutes a good argument for the bidder not to sweeten the offer and also an incentive to tender, in anticipation of a downward adjustment of the post-takeover share price.

IFM improves the offer. In this case, I do not think that the improvement would be very significant (less than 5%) with a low probability, in my view.

I do not see an interesting option holding the shares until the end of the acceptance period (8 October), considering the risks. It could potentially be interesting to stay up to five calendar days before the end of the acceptance period (2 October), in case there is an improvement in IFM's offer during this period and sell upon the news. The option of holding the shares and not tendering them entails a risk of illiquidity (the free-float could be greatly reduced) and the potential for revaluation in the medium term is not excessively attractive (median TP on Capital IQ consensus is €22.37), albeit the dividend yield is c. 5.6%.

IFM/Naturgy: Board Opinion And Bid Scenarios

Spain

Iberdrola S.A. generates, distributes, trades, and markets electricity in the United Kingdom, United States, Spain, Portugal, and Latin America.  The Company specializes in clean energy and more specifically wind power.

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Iberdrola SA (IBE SM)

Demerger Plans for Naturgy

The demerger does not represent much upside potential in my view, other than paving the way for future corporate operations. Naturgy seems...

Jesus Rodriguez Aguilar

Iberdrola/PNM Resources: Longstop Date Extension

Although the deal has entered an uncertain situation, Iberdrola will not let it go without a fight and chances may increase in the future. Gross...

Jesus Rodriguez Aguilar

Iberdrola/PNM Resources: PRC Vetoes the Purchase of PNM

The operation enters an uncertain situation, with a very high probability that it won't materialise. Median implied valuation of PNM Resources...

Jesus Rodriguez Aguilar

Hearing Examiner Recommends Against Iberdrola (Avangrid)/PNM Resources Deal

TP is $50.3, as the deal should complete, in my view, although it may take longer than the initial deadline. Gross spread is 5.3%. Long PNM US,...

Jesus Rodriguez Aguilar

IFM/Naturgy: Board Opinion And Bid Scenarios

It could potentially be interesting to stay up to 2 October, in case there is an improvement in IFM's offer and sell upon the news, unless one...

Jesus Rodriguez Aguilar

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