The sell-off in utility stocks has done nothing to prevent National Grid getting a stupendous price in the sale of its gas pipeline business. Sometimes competition for scarce assets weighs more heavily in M&A than unfavorable market conditions.
The U.K.-based power distributor and generator on Thursday agreed to sell a 61 percent stake in its pipelines for 3.6 billion pounds ($4.6 billion) to a consortium comprising Australian, U.K., German, Chinese and Qatari funds. It's potentially a controversial deal, putting vital infrastructure in the hands of foreign owners. But the scope for domestic uproar is lessened by the diverse nature of the group.
As a further sop to public opinion, 150 million pounds of the proceeds are going to be given to British consumers. That sets a precedent in U.K. utilities M&A that other vendors may now feel compelled to replicate.
It's not hard to see why National Grid felt the pressure to spread the benefits of the deal beyond shareholders. It has got a smashing price. The terms ascribe an enterprise value of 13.8 billion pounds, a near-60 percent premium to the asset value expected to be assigned by the regulator and higher than comparable transactions.
And National Grid is getting more than just the proceeds of the sale. It added extra leverage onto the pipelines as part of the deal, raising a further 1.8 billion pounds. Most of the total 5.4 billion proceeds will be paid out in a special dividend. The shares rose as much as 3.5 percent.
That leaves pipelines funding a colossal 7.8 billion pounds of new and refinanced debt. It's evidence that the recent turn in the credit markets hasn't put debt investors off helping businesses with stable cashflows like this.
The transaction initially looks favorable for the buyers. The pipelines generate about 900 million pounds of operating profit. If the borrowing costs on the whole structure are between 2 and 3 percent, the annual interest bill on the debt pile would be around 200 million pounds. Even allowing for tax, that should still leave a decent single-digit yield for the new owners.
But that overstates the broader economics. The pipelines are going to need considerable investment in the coming years: the real returns from this will only emerge in the very long term.
If the sell-off in utility and other high yielding stocks goes on into next year, this kind of asset may be cheaper in 12 months' time and the consortium will have bought at the peak. But the buyers had no alternative. National Grid had got an auction going for a scarce asset. The choice was paying up -- or waiting a long time for a similar opportunity.
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