European Event-Driven Analyst

Jesus Rodriguez Aguilar

Jesús is an Insight Provider (Event-driven) on the Smartkarma network, where he looks across sectors at opportunities arising from securities mispricing (both credit and equity), share classes, bid announcements, prospective bids, and special situations. He has served as Economic and Business Advisor at the Spanish Congress in Madrid. Prior to that, he has worked in the City of London: as a Credit Analyst at Bloomberg; Event-driven associate at former boutique European Research; and doubled as Special Situations and Equity-linked VP (convertible bonds) at Merrill Lynch. Jesús has an MBA from the London Business School, a BA (Hons.) degree in Economics from the Complutense University in Madrid, and a BA (Hons.) in Law from U.N.E.D., also in Madrid.

Naturgy - IFM: Consideration Adjustment, New TP, Attractive Spread

IFM Investors to Launch a Partial Hostile Tender Offer for Naturgy

Event-Driven

The Government's first assessments of the offer are polite, but cold and distant. The Vice President of Economic Affairs, Nadia Calviño, warned that the Government will analyze the IFM offer with “detail” and “great care”.
<ul class="">
<li>IFM initially foresaw a quick and express resolution, between two and three months, but now it has begun to signal that the calendar could extend even until summer. The Government has six months, but this authorization, if and when it finally arrives, can delay the whole process.</li>
<li>I see this authorization as highly likely.</li>
</ul>
The offer assigns a key role to Criteria Caixa, which must now trade off between increasing its portfolio diversification (meaning a possible partial exit from Naturgy) and the dividend it receives from Naturgy. The presence of Criteria Caixa has historically been a guarantee of stability in the shareholding of Naturgy.
Taking into account the apportionment scenarios developed in the insight, a possible scenario would be to go long the shares at the current market price of €21.34 and sell at levels of €22.0. Rationale:
<ol class="">
<li>
Low liquidity: failure to tender or not sell in the market at these levels would mean keeping a share with reduced liquidity (free float could be below 10%), but a 2021e dividend yield (Capital IQ estimates) of 7% (at 2 February close);</li>
<li>
Risks that the operation will not succeed:
<ol style="list-style-type: lower-roman;">
<li>There is a risk that 17% of the share capital will not be reached (minimum level of acceptance required by IFM) and the operation will not happen.</li>
<li>An additional risk is that the government will not approve the operation, or approval will be delayed for six months.</li>
</ol>
</li>
<li>
What does a price of €22.0 discount? This price assumes that 60% of the shares are accepted in the offer at a price of € 23.0 per share and the rest of the shares trade at c. €20.50 (Capital IQ consensus median TP). This scenario seems relatively positive. If the effective apportionment in the offer were only 39.3% (CriteriaCaixa and Sonatrach tender), the share could move towards levels closer to €21.0.</li>
<li>
Upside risks:
<ol style="list-style-type: lower-roman;">
<li>Analysts generally see the price of the offer attractive and most advise accepting it given the uncertainties that arise about Naturgy's business strategy and because of the liquidity risk that a low free float would imply. Nevertheless some analysts are raising their target prices up to 25% above the offer price and the median implied EV/Fwd EBITDA implies a TP of €23.21 per share, just above the offer.</li>
<li>Prospects offered by its business reorganization, with more investment in renewables and sale of non-strategic assets, look good.</li>
<li>The strategic plan that Naturgy intends to present could also be taken positively by the market and the share price could rise above the offer.</li>
</ol>
</li>
</ol>
The gross spread to the offer price is 7.2%, and the spread to the apportionment weighted TP of €22 is 3%. Reiterate LONG NTGY SM.

The Government's first assessments of the offer are polite, but cold and distant. The Vice President of Economic Affairs, Nadia Calviño, warned that the Government will analyze the IFM offer with “detail” and “great care”.

IFM initially foresaw a quick and express resolution, between two and three months, but now it has begun to signal that the calendar could extend even until summer. The Government has six months, but this authorization, if and when it finally arrives, can delay the whole process.
I see this authorization as highly likely.

The offer assigns a key role to Criteria Caixa, which must now trade off between increasing its portfolio diversification (meaning a possible partial exit from Naturgy) and the dividend it receives from Naturgy. The presence of Criteria Caixa has historically been a guarantee of stability in the shareholding of Naturgy.
Taking into account the apportionment scenarios developed in the insight, a possible scenario would be to go long the shares at the current market price of €21.34 and sell at levels of €22.0. Rationale:


Low liquidity: failure to tender or not sell in the market at these levels would mean keeping a share with reduced liquidity (free float could be below 10%), but a 2021e dividend yield (Capital IQ estimates) of 7% (at 2 February close);

Risks that the operation will not succeed:

There is a risk that 17% of the share capital will not be reached (minimum level of acceptance required by IFM) and the operation will not happen.
An additional risk is that the government will not approve the operation, or approval will be delayed for six months.



What does a price of €22.0 discount? This price assumes that 60% of the shares are accepted in the offer at a price of € 23.0 per share and the rest of the shares trade at c. €20.50 (Capital IQ consensus median TP). This scenario seems relatively positive. If the effective apportionment in the offer were only 39.3% (CriteriaCaixa and Sonatrach tender), the share could move towards levels closer to €21.0.

Upside risks:

Analysts generally see the price of the offer attractive and most advise accepting it given the uncertainties that arise about Naturgy's business strategy and because of the liquidity risk that a low free float would imply. Nevertheless some analysts are raising their target prices up to 25% above the offer price and the median implied EV/Fwd EBITDA implies a TP of €23.21 per share, just above the offer.
Prospects offered by its business reorganization, with more investment in renewables and sale of non-strategic assets, look good.
The strategic plan that Naturgy intends to present could also be taken positively by the market and the share price could rise above the offer.



The gross spread to the offer price is 7.2%, and the spread to the apportionment weighted TP of €22 is 3%. Reiterate LONG NTGY SM.

IFM's Partial Offer for Naturgy: Role of Spanish Government and Apportionment Scenarios

Naturgy Energy Group SA

IFM's Partial Offer for Naturgy: Role of Spanish Government and Apportionment Scenarios