E.ON Rete: Consolidation continues
The F2i/AXA partnerships 100% success rate is based on a mix of aggressiveness and solid bank support. F2i is a 75% shareholder in the venture and AXA 25%. The fact that F2i is the equity arm of state postal savings company Cassa Depositi e Prestiti (CDP) also provides a compelling story for the Italian authorities, which have been accused of protectionist tendencies in the past. The partnership beat rivals Blackstone, Goldman Sachs Infrastructure Partners and Macquarie to acquire the asset.
The enterprise value of the acquisition is Eu295 million and the acquisition debt financing totals Eu190 million. The bank group providing the debt comprises Banca IMI (agency and security bank), UniCredit, Credit Agricole, HSBC, SG and Santander.
The debt package comprises five facilities: a Eu135 million five-year term loan, a Eu20 million capex tranche and a Eu5 million working capital facility. The remaining two facilities are made to the holding company used to buy the assets, will be used to refinance existing operating company debt, and will come due within a year. After one year the holding company will be merged into the operating company.
The average debt service coverage ratio is 1.25x and the debt margin begins at 225bp over Euribor for the first two years, before stepping up to 300bp. The upfront commitment fee is 200bp. Banks are assuming an average asset life of around 25-years so are comfortable with a minimal amortisation of the debt and large balloon. The amortisation follows an implicit tenor of 23 years.
The deal is similar to the Enel Rete gas refinancing that closed in September 2009 but with tighter margins, smaller fees and more aggressive coverage ratios a reflection on the smaller size of the deal and an improvement in bank market appetite. The Eu1.025 billion Enel Rete financing comprised three five-year facilities a Eu800 million acquisition facility, a Eu150 million capital expenditure facility and a Eu75 million revolving credit facility.
All three pieces were lead arranged by a club comprising Banca IMI, Mediocredito Centrale, Mediobanca Banca di Credito Finanziario, Monte dei Paschi di Siena Banking Group, JP Morgan Chase, Calyon, Societe Generale, BNP Paribas, HSBC, Natixis and Banco Santander. The margin on the debt is 275bp over Euribor for years one to three, 325bp for years three to four and 425bp at year five. The upfront fee is 225bp. Minimum debt service coverage ratio is 1.3x and debt-to-Ebitda under the base case is 4.8x
The E.ON Rete gas network sale is part of E.ONs strategy to realise Eu10 billion through the sale of non-core assets. The gas network comprises over 9,300km of gas lines serving around 600,000 clients.
E.ON cancelled an auction for the network in the first half of 2010 because bidders did not meet its valuation, apparently because of concerns about the expiry and near-maturity of several long-term contracts. Despite these concerns, according to one source close to deal, the rates runoff and new concessions gained by the business has kept the total broadly stable over the last five years, at around 200 contracts.
The Italian Authority of Electricity and Gas regulates the business, and sets tariffs according to a cost-plus model, which allows operators to pay operating costs, debt amortisation and receive a return on equity of 8.5%. The sponsors plan to refurbish the network and undertake upgrades using the Eu20 million capital expenditure debt facility, which will allow the sponsors to receive a higher return from the regulator on upgraded assets, possibly up to an additional 2% per year. The tariff is set every four years by the regulator, with the next review due in two years.
The Italian gas network sales are driven by utilities desire to streamline their businesses and divest non-core assets. The Italian gas network market is fairly fragmented. The largest player is Eni subsidiary Italian Gas, which has a market share of 35%. F2i and AXA are making bold steps towards consolidating the market and with the Eu1 billion Enel Rete acquisition their market share is around 17%. Competition issues are therefore unlikely to intrude, even if they win the GDF Suezs G6 assets, which have a regulated asset value of around Eu750 million. The deadline for the bids is 15 May, with the auction being run by Banca Leonardo. Given F2i and AXAs recent success and economies of scale it would be rash to bet against them.
E.ON Rete Srl
Status: Financial close 7 April 2011
Size: Eu190 million
Location: Italy
Description: Acquisition financing of E.ONs Rete Gas network in northern Italy
Sponsors: F2i (75%) and AXA Private Equity (25%)
Mandated lead arrangers: Banca IMI (agency and security bank), Unicredit, Credit Agricole, HSBC, SG and Santander
E.ONs financial advisers: Deutsche and Deloitte
E.ONs legal adviser: Clifford Chance
Sponsors financial adviser: HSBC
Sponsors legal advisers: Ashurst and Gianni Origoni Grippo & Partners
Lenders legal adviser: Allen & Overy
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