HELSINKI, Dec 12 (Reuters) – State-controlled Finnish utility Fortum has agreed to sell its local power distribution grid to a consortium of institutional investors led by First State Investments and Borealis Infrastructure for 2.55 billion euros ($3.5 billion).
The deal is the latest in a series of regulated distribution network sales made by large energy firms wanting to cut debt and focus on their power generation businesses instead.
At the same time it highlights the increasing popularity of established infrastructure assets for pension funds and other institutional investors seeking relatively safe and assured returns in a low interest rate world.
The price Fortum got for the Finnish grid far exceeded expectations and it is now looking to sell its Swedish and Norwegian distribution networks.
“It looks like the price is around 10-15 percent higher than what was expected,” said Jari Honko, an Alandsbanken portfolio manager who said Fortum was one of his fund’s biggest investments.
The deal values the Finnish network at around 16.6 times earnings before interest, taxes, depreciation and amortisation (EBITDA), well above multiples of around 10 in previous deals in the sector.
Markku Jarvinen, analyst at Finnish brokerage Evli, said that applying the same valuation would make all of Fortum’s grids worth a total of around 9 billion euros.
“I can’t see a reason why the Finnish grid would be much more expensive than the Swedish one. In any case, the indication is that we end up with a much higher valuation than expected,” he said.
Fortum launched the sale of the grid in September and Reuters reported on Wednesday that the company was in exclusive talks with the consortium.
It said it would book a gain of up to 1.9 billion euros on the deal, corresponding to around two euros per share.
The Finnish grid, which covers about 20 percent of the country’s local eletricity distribution, booked 325 million euros of sales and 154 million in EBITDA over the last 12 months.
The Fortum group’s distribution businesses have in total yielded a return on net assets of about 8 percent and with total sales of around 1 billion euros contributed some 17 percent of the group’s turnover last year.
First State, an asset management business owned by Commonwealth Bank of Australia, and Borealis Infrastructure, owned by Canadian pension fund OMERS, both have a 40 percent stake in the buying consortium called Suomi Power Networks.
It also includes Finnish pension funds Keva, with 12.5 percent and LocalTapiola Pension with 7.5 percent.
The hefty profit raised speculation over what the company might do with the proceeds.
“It is interesting to see what they will do with these gains. I think one possible option is to buy (German energy utility) E.ON‘s nuclear or hydro assets in Sweden,” said Alandsbanken’s Honko.
But Evli’s Jarvinen said the profit could eventually go to shareholders. The Finnish government is widely seen as counting on a higher dividend from Fortum after the sale. ($1=0.7251 euros)
(Reporting by Jussi Rosendahl; Editing by Greg Mahlich and Ritsuko Ando)
Photo courtesy of Shutterstock