The recent histories of Spanish utility Endesa and Italian utility Enel are intertwined.
Ten years ago, Enel and Spanish counterpart Acciona were locked in a bitter battle with German rival E.On for control of Endesa. The fight was resolved in 2007 when Enel and Acciona agreed to buy 92% of Endesa for €42.5bn, with Enel holding 67% and Acciona 25%. This was just before the Spanish economy crashed in 2008.
The crash didn't stop Enel. In 2009, the Italian firm grew its stake in Endesa to 92% as it bought out Acciona’s shareholding, and Enel has remained majority owner in Endesa to this day. Enel currently holds 70% of Endesa after selling 22% in late 2014 for €3.1bn.
Then you get to the subsidiaries. In 2010, Endesa bought a 40% stake in the Spanish operations of Enel’s renewables arm Enel Green Power, called Enel Green Power Espana. EGP Espana owns almost 100 renewables projects in Spain, totalling 1.7GW.
And that, belatedly, brings us to the main thrust of this piece.
Two weeks ago, it emerged that Endesa is looking to buy the 60% that it does not own in EGP Espana, in a deal that could be worth up to €3bn. But why? Enel owns 88% of EGP Espana through its investments in Enel Green Power and Endesa; and this up-to-€3bn deal would simply reduce this to 70%.
Well, we have a theory.
The obvious reason is that such a deal would enable Enel to simplify its structure. The firm is in the process of reintegrating Enel Green Power into the main Enel business so it can be the main driver of the Italian utility’s growth. This €3.1bn reintegration, which is effectively a reverse merger, was agreed by shareholders in January and is starting to take shape. If Enel moves its Spanish renewables into Endesa then that makes things even simpler.
But we think there is more to it than this: it could also point the way for Enel to sell out of Endesa. That is our speculation rather than what the company has said, but it would make sense.
It certainly tallies with the company’s recent strategy. In November, EGP Espana sold its assets in Portugal for €900m to part of global asset manager First State Investments.
It did this because it wanted to recycle its capital out of low-growth established markets like Portugal so it can then re-invest it in high-growth markets, mainly in Latin America.
The demographics in Spain are similar to those in Portugal. The Spanish government has recently been looking to reinvigorate its renewables market, but there is next to no prospect that Spain will return to its boom-time days of the early 2000s. Therefore, if Enel wants to move more into markets with high returns, it would make sense to sell Endesa and its reliable cash-generating assets to an institutional investor. Enel can then reinvest elsewhere.
Of course, this would rely on a risk-averse institution taking a chance on Spain, where the wind industry has been burned by retrospective cuts to renewables subsidies over the last five years. The country is in a state of political upheaval after the election at the weekend, its second in six months, and is being led again by the subsidy-cutting prime minister Mariano Rajoy. But, as always, we are sure a deal could be done if the price justified the risk.
The prospect of selling Endesa might not be in Enel’s mind, of course, but it should be. It just needs to find a willing buyer.
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