Fortum Jumps as $3.5 Billion Finnish Grid Sale Price Lauded

Fortum Oyj, Finland’s biggest utility, gained the most in 4 1/2 years in Helsinki after earning more than expected on the sale of its power distribution business in the Nordic country.

The shares jumped as much as 8 percent, the biggest intraday gain since May 7, 2009. Fortum traded 3.9 percent higher at 17.50 euros at 2:30 p.m. in Helsinki. Trading volumes were almost four times the 90-day average.

Fortum sold the unit for 2.55 billion euros ($3.5 billion) on a debt and cash-free basis to a group of investors including Canada’s Borealis Infrastructure Management Inc. It will book a one-time sales gain of as much as 1.9 billion euros, the Espoo-based company said in a statement. The deal with Suomi Power Networks Oy is seen closing next quarter, subject to regulatory approval, Fortum said.

“The price seems really good, it took me by surprise,” Teemu Vainio, an analyst at Oslo-based Pareto Securities AS, said by phone from Helsinki. He previously estimated the Finnish grid’s value at about 1.8 billion euros. “This indicates that the expected value of the Swedish grid will surely rise.”

Fortum is seeking to focus on generating power and is preparing for a possible sale of its distribution networks in Sweden and Norway, it said today.

Guaranteed Yield

Infrastructure assets are attracting interest from institutional investors and pension funds because of their relative safety and steady cash flows.

“Finland is a country of small risk,” Vainio said. “The business itself practically guarantees a certain level of yield.”

First State Investments and Borealis Infrastructure each own 40 percent of Suomi Power Networks. Finnish pension fund Keva has 12.5 percent and LaehiTapiola Pension the remaining 7.5 percent. Revenue from Fortum’s grid in Finland was 321 million euros last year, according to the company.

Suomi Power seeks a loan of about 2 billion euros to finance the acquisition from a group comprising at least nine lenders, including Deutsche Bank AG and the Royal Bank of Canada, according to two people familiar with the financing, who asked not to be identified as the talks are private. Pekka Timonen, a spokesman for Suomi Power working for Kreab Gavin Anderson, declined to comment on the debt financing.

Selling the grid at a price which “clearly exceeds” the generally used estimate of 2 billion euros is positive for shareholders, Juha Kinnunen, an analyst at Helsinki-based Inderes Oy, said in a note today.

U.K. Bid

Borealis is the infrastructure arm of Omers, Canada’s sixth-biggest pension-fund manager.

In June, it was part of a group that abandoned a 5.3 billion-pound ($8.7 billion) bid for U.K. utility Severn Trent Plc. It co-owns the U.K.’s largest ports operator, Associated British Ports.

Bondholders started selling their holdings in Fortum earlier this year as grid sale plans were unveiled, amid concern the company will become more vulnerable to business cycles.

The sale is “good news” from a valuation perspective, whereas strategically it would be preferable for Fortum to keep the networks, Ingo Becker, an analyst at Kepler Cheuvreux in Frankfurt, said in a note to clients. He values Fortum’s combined distribution businesses at 6.9 billion euros.

Sacred Dividend

The company’s profitability in Russia suffered from unplanned outages and debt losses during the third quarter. The Russian government’s plan to limit future increases in gas tariffs have made its profit target “more challenging,” the company said on Oct. 23.

“The deal looks both safe and economically sound,” Finland’s Economy Minister Jan Vapaavuori said in an e-mailed statement, responding to Finnish lawmakers’ concerns that the sale would hurt the security of supply. “For the government, investing billions in an electricity grid which provides no new jobs or tax revenue would have been an expensive solution.”

Fortum sold its stake in Finland’s main electricity transmission grid in 2011, making the Finnish state the majority owner of Fingrid Oyj. The government will keep these “strategically important” networks under its control in the future too, Vapaavuori said.

Fortum has paid an annual dividend of 1 euro per share for five years running. It will continue on this track for the next two years, according to Bloomberg projections.

“The one-euro dividend has been held sacred,” Pareto’s Vainio said. “This is a way to guarantee it. I don’t believe in aggressive extra dividends or investments. It’s more about calming things down in a difficult market situation, amid Russian uncertainty and low electricity prices.”