How to Beat the Competition to a $20 Billion Deal

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Infrastructure funds must be seething. They missed out on deals for some $25 billion of power assets announced on Thursday as U.S. utility PPL Corp. sold a huge chunk of its business to U.K. peer National Grid Plc, taking cash and assets in return. National Grid played a trump card to see off competition in the auction from them and other rivals. Even so, it’s also had to make sacrifices.

The deal makes broad strategic sense. PPL is jettisoning the Western Power Distribution unit that distributes power in England’s south west and Midlands, and in south Wales. The move will reduce its exposure to the U.K. regulatory regime, something that’s been a headache for U.S. investors, and strengthen the balance sheet. Meanwhile, National Grid boosts its exposure to the broad trend of electrification with the WPD purchase. For example, the rollout of electric vehicle charging points will feed off that network.

PPL has secured a decent price. At an enterprise value of 14 billion pounds ($20 billion), it’s nearly 80% on top of the value of WPD’s regulated assets as of 2020. That falls to around 60% over the expected 2022 asset value. It’s scarcely a bargain for National Grid, but if the asset base can keep growing around 5%, the premium won’t look so rich a few years out. And while there are no concrete synergies, National Grid’s argument that it is tilting its business (and ultimately its dividends) in a more sustainable direction stacks up.

The transaction comes with a kick. National Grid has sold one of its U.S. businesses, a gas and electricity distributor in Rhode Island that was previously core to its strategy, for just over $5 billion including assumed net debt. It had to surrender the asset to provide an edge over the other bidders. Here it’s PPL paying the chunky price, which comes in around double the unit’s 2020 regulated asset base.

The surprises don’t end there. National Grid can afford all this without having to raise equity. Instead, bridge financing will cover its investment. The plan is to pay this off by selling at least 51% of its U.K. gas transmission arm. With an asset base of 6.4 billion pounds, that’s going to be another colossal deal, with the strategic benefit of reinforcing the emphasis on electricity over gas.

It adds up to a big transformation at both PPL and National Grid. PPL flagged all this to shareholders months ago. But the U.K. company’s involvement came out of the blue and shareholders initially struggled to digest it. National Grid wants the transactions to be judged as one package. But without knowing the full size and scope of the planned gas disposal, that’s hard to do today. It’s not clear what demand will be for that. If National Grid is lucky, some of the rivals it just beat in PPL’s auction will now queue up to secure its cast-off as a consolation prize.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

©2021 Bloomberg L.P.

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