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>KKR intends to offer €0.505/ordinary&amp;savings, a 44% premium and 5.2x EV/Fwd EBITDA. KKR is willing to split Telecom Italia, by separating the network (Infra Co) from the services (ServiceCo).</li>
<li>The attempt would need 67% of the ords float tendered and no interference from the Italian Government. The market is cautious, but believes this time can happen.</li>
<li>In light of the possible offer, I change my recommendation to long TIT IM, long TITR IM, TP 0.505/share. Gross spread is 10.5%. The premium savings/ordinary shares has decreased to 0.9%.</li>
</ul>


KKR intends to offer €0.505/ordinary&amp;savings, a 44% premium and 5.2x EV/Fwd EBITDA. KKR is willing to split Telecom Italia, by separating the network (Infra Co) from the services (ServiceCo).
The attempt would need 67% of the ords float tendered and no interference from the Italian Government. The market is cautious, but believes this time can happen.
In light of the possible offer, I change my recommendation to long TIT IM, long TITR IM, TP 0.505/share. Gross spread is 10.5%. The premium savings/ordinary shares has decreased to 0.9%.


KKR Potential Offer for The (W)Hole of Telecom Italia

The bid was saved at the eleventh hour. As per the <a href="https://www.naturgy.com/files/14102021_IP_resultado_OPA_EN.pdf" target="_blank" rel="noopener">CNMV release</a>, IFM achieves 10.83% of the capital 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> in the takeover bid. The fund waives the minimum requirement of 17% and complete the deal. There is no apportionment.From the bid announcement, IFM was confident that the partial takeover bid would succeed with at least 17% of the share capital tendered, but IFM reserved one last wild card, lowering the threshold to 10% (imposed by the banks' syndicate as the minimum to grant the financing). Thus ends one of the most controversial deals in Spain in recent years. The interesting question is what is IFM seeking in Naturgy. To obtain a paltry 10.8% it would have been much cheaper buying the shares in the market.Naturgy reduces its weight in the Ibex-35 as a result of the offer. After reducing the free float, the Technical Advisory Committee (CAT) of the index decided yesterday that it will take 20% ​​of Naturgy's capital as a reference for calculating the weighting, instead of the current 40%. Naturgy ended the session yesterday in 14th place on the Ibex, with a weight of 1.90%, according to the report by Bolsas y Mercados Españoles (BME).The adjustment will take place today Friday 15 October, at the close of the session with effect next Monday, 18 October.The loss of weight of Naturgy in the Ibex-35 may cause some investors that replicate indices to sell shares to adjust to the new scenario. Although the battle that is now opening in the council could act as support for the shares.After the takeover results were announced, Naturgy's shares soared and closed at €24, 4.62% more than on the prior session, possibly due to the accelerated repurchase of shares by hedge funds short the stock. Meanwhile, La Caixa is likely to continue buying shares to strengthen its position (up to 29.9%).Sell on strength.<ul>
<li>I do not see potential for meaningful gains at the current prices. The shares closed on 15 October at €23 (with c. €88 mn traded), exceeding Capital IQ consensus TP of € 22.25;</li>
<li>Lower liquidity after the takeover bid, given that the free-float is reduced from the current 27% to 16%. Its weight in the Ibex-35 will be reduced from 1.9% nowadays to approximately 1%. Some investors that replicate indices to sell shares to adjust to the new scenario. Although the battle that is now opening in the council could act as support for the shares.</li>
<li>Dividend yield at current prices remains below 5%. There are other options in the sector with greater potential for revaluation, higher liquidity and higher dividend yield (such as <a href="https://www.smartkarma.com/entities/red-electrica-corp-sa" target="_blank" data-smartkarma-citation="entities:21291:1" rel="noopener">Red Electrica Corp SA (REE SM)</a> and <a href="https://www.smartkarma.com/entities/enagas-sa" target="_blank" data-smartkarma-citation="entities:21266:1" rel="noopener">Enagas SA (ENG SM)</a>).</li>
</ul>

The bid was saved at the eleventh hour. As per the CNMV release, IFM achieves 10.83% of the capital of Naturgy Energy Group SA (NTGY SM) in the takeover bid. The fund waives the minimum requirement of 17% and complete the deal. There is no apportionment.From the bid announcement, IFM was confident that the partial takeover bid would succeed with at least 17% of the share capital tendered, but IFM reserved one last wild card, lowering the threshold to 10% (imposed by the banks' syndicate as the minimum to grant the financing). Thus ends one of the most controversial deals in Spain in recent years. The interesting question is what is IFM seeking in Naturgy. To obtain a paltry 10.8% it would have been much cheaper buying the shares in the market.Naturgy reduces its weight in the Ibex-35 as a result of the offer. After reducing the free float, the Technical Advisory Committee (CAT) of the index decided yesterday that it will take 20% ​​of Naturgy's capital as a reference for calculating the weighting, instead of the current 40%. Naturgy ended the session yesterday in 14th place on the Ibex, with a weight of 1.90%, according to the report by Bolsas y Mercados Españoles (BME).The adjustment will take place today Friday 15 October, at the close of the session with effect next Monday, 18 October.The loss of weight of Naturgy in the Ibex-35 may cause some investors that replicate indices to sell shares to adjust to the new scenario. Although the battle that is now opening in the council could act as support for the shares.After the takeover results were announced, Naturgy's shares soared and closed at €24, 4.62% more than on the prior session, possibly due to the accelerated repurchase of shares by hedge funds short the stock. Meanwhile, La Caixa is likely to continue buying shares to strengthen its position (up to 29.9%).Sell on strength.
I do not see potential for meaningful gains at the current prices. The shares closed on 15 October at €23 (with c. €88 mn traded), exceeding Capital IQ consensus TP of € 22.25;
Lower liquidity after the takeover bid, given that the free-float is reduced from the current 27% to 16%. Its weight in the Ibex-35 will be reduced from 1.9% nowadays to approximately 1%. Some investors that replicate indices to sell shares to adjust to the new scenario. Although the battle that is now opening in the council could act as support for the shares.
Dividend yield at current prices remains below 5%. There are other options in the sector with greater potential for revaluation, higher liquidity and higher dividend yield (such as Red Electrica Corp SA (REE SM) and Enagas SA (ENG SM)).


IFM/Naturgy: Tender Results & Ibex-35 Index Implications

The recent reforms incorporate "loyalty shares" as an option, which in practice come to transform the 'one share one vote' rule that prevailed in listed companies to protect equal voting rights of shareholders. The instrument equates the Spanish rules with those of other European Union countries, such as Germany, Italy, France or the Netherlands, among others, and aims to reward long-term investors, also protecting companies against short-term investors (opportunistic funds).
The Government toughens the takeover law before the arrival of 'loyal investors' on fear that hard core shareholders will take control of Spanish companies with the new double voting system.
According to the change in the regulation, an investor who exceeds 30% of the vote of a company listed due to the double voting rights of the loyalty shares, will have three months to decide whether to launch a takeover bid, reduce participation or waive its new political rights.
The Ministry of Finance discreetly introduces the change in the new Securities Market Law.
In Spain, the companies that establish the double voting system will be less prone to receiving a takeover offer. If it is already difficult to carry out an offer now without the support of the hard core nucleus on shareholders (for instance, MásMóvil has had to agree with those of <a href="https://www.smartkarma.com/entities/euskaltel-sa" target="_blank" data-smartkarma-citation="entities:21263:1" rel="noopener">Euskaltel SA (EKT SM)</a> ), it will be next to impossible under the new framework.

The recent reforms incorporate "loyalty shares" as an option, which in practice come to transform the 'one share one vote' rule that prevailed in listed companies to protect equal voting rights of shareholders. The instrument equates the Spanish rules with those of other European Union countries, such as Germany, Italy, France or the Netherlands, among others, and aims to reward long-term investors, also protecting companies against short-term investors (opportunistic funds).
The Government toughens the takeover law before the arrival of 'loyal investors' on fear that hard core shareholders will take control of Spanish companies with the new double voting system.
According to the change in the regulation, an investor who exceeds 30% of the vote of a company listed due to the double voting rights of the loyalty shares, will have three months to decide whether to launch a takeover bid, reduce participation or waive its new political rights.
The Ministry of Finance discreetly introduces the change in the new Securities Market Law.
In Spain, the companies that establish the double voting system will be less prone to receiving a takeover offer. If it is already difficult to carry out an offer now without the support of the hard core nucleus on shareholders (for instance, MásMóvil has had to agree with those of Euskaltel SA (EKT SM) ), it will be next to impossible under the new framework.

Loyalty Shares in Spain: Double-Voting Rights Could Hinder Takeovers

Co-founder & Managing Director, Marketnomix 

Rajan Govil

Co-founder & Managing Director

Marketnomix 

Macroeconomics

Industrial production in Eurozone continues to struggle to gain momentum and came in weaker than expected in June which poses a risk to our GDP outlook of 1.3% for 2016 (lowered from 1.6% after the Brexit vote). While the weakness in factory output was seen ahead of the Brexit vote, the effect of UK’s exit is clearly felt in the aftermath, and it is expected to come in weaker going forward.Industrial Production (IPI) in the Eurozone came in at 0.4% y-o-y in June 2016 similar to the growth seen…

Industrial production in Eurozone continues to struggle to gain momentum and came in weaker than expected in June which poses a risk to our GDP outlook of 1.3% for 2016 (lowered from 1.6% after the Brexit vote). While the weakness in factory output was seen ahead of the Brexit vote, the effect of UK’s exit is clearly felt in the aftermath, and it is expected to come in weaker going forward.Industrial Production (IPI) in the Eurozone came in at 0.4% y-o-y in June 2016 similar to the growth seen…

EUROZONE: Weak Industrial Production Poses Risk to GDP Growth

Spain

Red Electrica Corporacion S.A. maintains and operates Spain's electricity transmission grid .  The Company extends the high-voltage grid and coordinates the production and transmission systems.

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Red Electrica Corp SA (REE 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

KKR Potential Offer for The (W)Hole of Telecom Italia

In light of the possible offer, I change my recommendation to Long TIT IM, long TITR IM, TP 0.505/share. Additional upside could come from a...

Jesus Rodriguez Aguilar

IFM/Naturgy: Tender Results & Ibex-35 Index Implications

IFM achieves 10.8%. Sell on strength on less potential for meaningful gains at current prices, lower liquidity and weight in the Ibex-35 will be...

Jesus Rodriguez Aguilar

Loyalty Shares in Spain: Double-Voting Rights Could Hinder Takeovers

In Spain, the companies that establish the double voting system will be less prone to takeover, such as Repsol SA (REP SM) and Telefonica SA (TEF...

Jesus Rodriguez Aguilar

EUROZONE: Weak Industrial Production Poses Risk to GDP Growth

Industrial production in Eurozone continues to struggle to gain momentum and came in weaker than expected in June which poses a risk to our GDP...

Rajan Govil

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