EDF, Centrica Firm Up Takeover Bid for British Energy

Details Emerging

The terms of a deal that would see French power giant Electricité de France (EDF) take control of U.K. nuclear operator British Energy are beginning to emerge. Various media reports suggest EDF will offer 775 pence per share for British Energy, valuing the company at around £12.4 billion (US$24.61 billion). Reuters suggested British Energy has already given its "in principle" agreement to the offer, although neither company has issued an official confirmation further to British Energy's statement last Thursday (24 July) noting it was in "advanced discussions" with one party. British Energy shares remained flat at around 728 pence following the reports on the preliminary terms, reflecting the ongoing uncertainty over the closing of the deal.

The firming-up of the terms of an offer follows two months of discussions between EDF and British Energy after EDF emerged as the only bidder during an initial open tender process (see "Related Articles"). The tender process was launched after the U.K. government confirmed it was to allow the construction of a new generation of nuclear power plants (NPPs) in the country back in January and moved to sell its 35% holding in British Energy to eliminate any conflict of interest during the process. British Energy operates eight nuclear power stations and holds many of the land sites considered suitable for new nuclear construction. Interest in the company was initially strong, with EDF, Germany's RWE, Spain's Iberdrola, and U.K. utility Centrica all seeking out further information to calculate potential takeover offers. However, growing concerns over the ageing nature of British Energy's existing nuclear suite in the wake of a series of maintenance and repair problems saw interest in the company dwindle, leading to EDF being confirmed as the only party to submit an offer during the open tender held in May. EDF is thought to have made an offer of around 700 pence per share, a price which British Energy deemed did "not represent value for shareholders". Discussions between the parties continued, however, and the recent reports suggest progress has been made in bringing their respective expectations in line.

Centrica Retains Its Interest

While British Energy's discussions appear to have been held with EDF alone, Centrica is continuing to show an interest in taking a stake in British Energy and has held its own discussions with EDF that could see its ambition fulfilled. Centrica currently exclusively operates gas-fired power stations, a portfolio which has left the company strongly exposed to increasing wholesale gas prices given it holds little upstream assets of its own. It is therefore looking to diversify its fuel sources by gaining a key role in the construction of new NPPs. Reports suggest Centrica is negotiating with EDF to take a 20-25% stake in the takeover vehicle that the French company will use to buy British Energy. Instead of paying straight cash for the stake, Centrica is thought to be offering up participation in a number of its upcoming wind farm and gas storage projects to EDF. Such a deal could prove attractive to the U.K. government also, given support for Centrica's renewable investments would assist with meeting the United Kingdom's overall targets for renewable energy development. Furthermore, it would also allow a portion of British Energy's assets to remain under British ownership.

Outlook and Implications

British Energy and EDF have clearly made good progress in hammering out a deal agreeable to both sides. Part of the reason for the negotiations taking so long has been the difficulty in applying a value to British Energy's assets. With its existing nuclear plants ageing and decommissioning to begin over the next decade, much of the company's value lies in its ownership of future nuclear sites and its considerable knowledge and expertise in the operation of nuclear reactors in the country. With around eight new NPPs considered likely to be built in the United Kingdom, British Energy holds a unique position to secure a strong place in the U.K. electricity sector for several decades to come. Nevertheless, with the process to construct new NPPs only in its very early stages, applying a value to such a position has proven challenging. While EDF's latest offer for the company is around 10% higher than its initial bid, the uncertainty associated with the future value of the company has meant that the offer continues to be lower than British Energy shareholders may be hoping for.

The exact details of the deal are expected to be confirmed in the coming days, potentially as early as tomorrow. Once a deal is agreed, the offer will be put to shareholders including the U.K. government, which would then be asked to recommend the terms. The process remains at a fragile stage; the expected offer from EDF is not strong enough to guarantee the support of British Energy shareholders, and the complication of the additional side deal with Centrica adds further instability. Regulatory clearance could prove a further hurdle for the transaction, particularly in relation to competition issues, with EDF already a significant player in the U.K. market and set to increase its share substantially with the British Energy purchase. As such, while the last few months of negotiations between EDF and British Energy appear set to produce a result, final confirmation on the future of the U.K. nuclear operator may still be some way off.

Related Articles

United Kingdom: 25 July 2008: EDF Close to Deal on British Energy Purchase

United Kingdom: 10 June 2008: British Energy Rebuffs Takeover Bids; EDF Reluctant to Raise Offer

United Kingdom: 16 May 2008: British Energy Confirms Several Bid Proposals

United Kingdom: 12 May 2008: British Energy’s Offers to Be Revealed in June; EDF Sole Confirmed Bidder

United Kingdom: 1 May 2008: Prospects of British Energy Bidding War Diminish as Contenders Drop Out

United Kingdom: 10 April 2008: RWE Already Tabled Offer for British Energy; EDF Also Conducting Due Diligence