Babcock & Brown and Babcock & Brown Wind Partners together launched the sale of a European wind portfolio earlier this year - bringing to market a range of assets totalling over 2,000MW and located across five countries in various stages of development.

The conclusion of BBW's sale of its operating Spanish portfolio (IJ News, 21 August 2008) for A$1.42billion (US$1.21bn) to Formento de Construcciones y Contratas last month resulted in an estimated profit before transaction costs of around A$266 million (US$227m).

The landmark sale bodes well for similar transactions lined up in Portugal, France, Germany and Greece.

Six months since the launch of the sale, IJ looks at the thinking behind the decision to sell and analyses the progress so far.

The sale

The sale process could potentially result in the disposal of around 2,000MW capacity including:

• 1,128MW operational facilities
• 412MW under construction
• 558MW expected to be completed by 2010

By country break down:

However, the vendors have said that if the price offered by buyers is not high enough, they will hold onto the assets.

Babcock & Brown and BBW have retained Deutsche Bank and JPMorgan as financial advisers for the sale.

Interested parties are able to purchase assets on a country-by-country basis. According to B&B's European Head of Infrastructure Antonino Lo Bianco, this reflects the company's decision to "offer the portfolios from day one in a format that allows multiple options and flexibility."

Why sell?

The vendors initiated the sale process to highlight what they saw as the embedded value of the assets held on the balance sheet that was not reflected in the share price.

They are certainly not alone in adopting such a tactic. Other wind asset owners have been drawn towards selling to take advantage of the high prices buyers - and utilities in particular - are currently willing to pay. Examples of this include:

• the sale of Airtricity by toll road operator NTR (51 per cent), Ecofin and the company's staff and management
• DONG Energy's Energi E2 Renovables Ibericas wind hydro and biomass portfolio in Spain and Portugal
• the sale of Airtricity's North American activities 

By contrast, those companies that opted for stock market-based strategies have experienced disappointment in the past year. Many have been pulled - Eolia, Fri-el, Agassiz Energy, and Infinis to name a few - while others, like Iberdrola Renovables, launched to a disappointing debut. EDP's floatation of its renewables business offers a lonely exception.

Babcock & Brown and BBW may well also be hoping to buoy their respective share prices through the sale process. By demonstrating the value of the assets, the vendors are aiming to prove that the assets remaining on the balance sheet are worth more than their current valuations applied by the public markets. The sale also presents an attractive opportunity to free up some cash through the disposal of assets that are becoming increasingly valuable given the legislative and consumer pressures for renewable energy.

Lo Bianco told IJ that funds from the sale would be used to pay down debt as well as contributing to new development projects in the same regions as the disposed portfolio. 

Sites in Poland are also currently under evaluation, though the vast majority of the developments will be sited in areas Babcock and BBW already have a foothold in. The Central & Eastern Europe region has higher perceived risks and potentially less long term returns making it less attractive, at least at present. In short, it is a "harder market unless you have all the right conditions," according to Lo Bianco.

The outcome

The sale of Babcock's Spanish assets totalling 420.7MW to Formento de Construcciones y Contratas amounts to roughly 17 per cent of BBW's total wind energy portfolio.

The successful completion of this large portfolio is positive for similar imminent transactions.

Miles George, BBW CEO, said: "The final EV sale price of approximately A$1.42 billion produces a large gain on sale for BBW and, importantly, is materially higher on a per megawatt basis than the current market implied value of BBW's total portfolio."

"Furthermore BBW retains access to the Spanish wind energy market via opportunities to acquire wind farms yet to be delivered under the Gamesa Framework Agreement which remains in place."

Lo Bianco told IJ that the sale of the company's Spanish assets was a relatively straight-forward transaction as it is comprised of fewer projects and less due diligence was required than the assets remaining to be sold. 

Formento de Construcciones y Contratas (FCC) paid for the assets on balance sheet. This is likely to be repeated in future sales given the strong degree of interest from utilities, which typically have strong balance sheets.

Acquisition negotiations are moving ahead at roughly the same pace in Portugal, France and Greece. Shortlists were formed before the European vacation period.

The situation in Germany is rather different. Babcock has said that it will only divest assets when bids are deemed high enough - as yet, this hasn't happened. Should the right bid fail to come forward, the vendors will keep the assets. "If we don't get the price we like, then we don't sell," Lo Bianco said.

Overall, Babcock & Brown's strategy to potentially sell in excess of 2,000MW is a bold one. Completion of the Spanish portfolio sale bodes well, and all eyes are on the company to see whether it can pull off other transactions with the same ease. If Babcock & Brown does deliver in its asset sale, it may well assist in turning around the fortunes of the company as a whole.