Large-scale private equity funds are starting to snap up large-scale renewable project developers. Since the heady days of early 2021 quoted green developer share prices have been on a slide. It was obvious cash-rich investors would step in at some stage. Now appears to be the time. But the disconnect between private and public market valuations continues in an era of more expensive debt.
"I am thrilled to share today’s big news that Neoen and Brookfield are planning to accelerate the energy transition together," Neoen chairman and CEO Xavier Barbaro said last week when the Brookfield/Temasuk €6.1bn deal to take Neoen private was announced. Well, that is one way of putting it. Perhaps more pertinently he added: "Brookfield can take us to the next level, in a very capital-intensive industry."
Barbaro said decarbonisation and value creation "really go hand in hand!" Neoen's track record in building a 10GW company over the last 15 years proves the point. But in the last three years the share prices of many green developers have halved. Neoen's share price reached €58 in early 2021 and had dropped to €30 by the time of the bid. The €39 bid represented a 26.9% premium to the current share price.
Three other major quoted renewable developers have been the subject of take-private bids. In March, KKR offered to acquire German renewable power producer Encavis for €2.8bn. The developer's share price had reached €25 in early 2021 and again €23 in August 2023 but was down to €11 when KKR offered €17.80.
EQT offered to buy Swedish renewables group OX2 for €1.4bn. The developer's share priced had reached SKr103.2 in August 2022 after an IPO in summer 2021 but had dropped to SKr40 before EQT offered SKr60. And ECP has agreed to buy Atlantica Sustainable Infrastructure for US$2.6bn. The fund's share price had reached US$46 in early 2021 but had dropped to US$18 before ECP offered US$22.
There is another bid pending but in the private-to-private space. An infrastructure investor is in talks with DE Shaw Renewable Investments that may lead to an acquisition deal. DESRI's enterprise value is expected to exceed US$7bn, according to a report, and a deal would be one of the largest ever for a renewables platform.
These bids are good for the debt markets with large structured deals being put in place to fund them. Leveraged returns are on the agenda. But can the private equity houses extract more value from the renewables companies? Will they provide a wall of money to allow the developers to push forward with their projects or will they steadily crystallise value by selling assets?
There is a general fear among global regulators that private equity has not revalued its assets properly since the onset of the era of higher interest rates. But valuation disciplines are at variance between private and publicly quoted assets. Discounts to net asset value in listed stock market renewable companies are currently around 20% while individual asset sales are coming in at a premium to NAV – as discussed in a PFI Comment piece in March – "Public versus private valuations."
If it is that simple, private equity houses could do very well indeed. But life is probably not that simple; the number of asset buyers, for instance, has certainly thinned.
Still renewables are here to stay, valuations do look a little low and the larger private equity houses need to do deals.
Not all energy stocks are suffering. Majors such as ExxonMobil, Shell and BP have all seen their share prices double since they tanked in early 2021.
Renewables have been hit by two factors. Developing, as Barbaro states, is a capital-intensive industry sensitive to debt raising costs. For investors seeking yield a rise in interest rates increases discount rates which reduces valuations. In addition power prices in many markets across the world have fallen following the spike caused by the Russian invasion of Ukraine.
International Power, a quoted independent power project developer in the old gas fired days whose staff felt they were at the top of the IPP game, faced similar problems in 2010 after the global finance crisis in 2008. It surrendered to GDF Suez, now Engie, in a £22bn deal.
This is from PFI in summer 2010: "International Power, for its part, has been the second-worse performing stock in the UK utilities sector in the past three months as investors fear its project financed growth is constrained by the downturn in the credit markets. The company undertook a series of credit-backed acquisitions between 2004 and 2008, which are no longer possible. While IP still has access to project-finance for long-term schemes, its corporate debt is pricey and financing merchant plants is more than challenging."
International Power was taken over by a utility. The new group of developers has been bought by a different sort of animal. Their sector needs a wall of cash to fufill the transition agenda. Private equity, for better or worse, is the new hope.
