For now, though, one of the biggest deals in one of the hottest sectors, the initial public offering (IPO) for Iberdrola Renovables, the renewable energy division of Spanish power company Iberdrola, is still slated to be launched before the end of this year. The Spanish company hopes to sell a 20% stake in the high-growth division, which analysts have valued at between €16 billion and €25 billion and which aims to grow its wind-power generation operation, especially in the US, through a huge and rapid investment programme over the next few years.
Equity capital markets bankers are looking forward to a new issue of €3 billion to €5 billion, much larger than the typical growth company IPO of a few hundred million euros. Will the markets be able to absorb it, especially if expectations increase of an economic downturn and slower corporate earnings?
Growth by acquisition
Iberdrola itself has been growing fast through acquisitions this year, having progressed with the consolidation of Scottish Power, acquired in a $24 billion deal, and having raised further capital to acquire US energy producer Energy East in a $4.6 billion agreed deal, all this while being subject to persistent rumour of a potential takeover bid from the company’s largest shareholder, Actividades de Construcción y Servicios. The presence of ACS on the share register has, some analysts believe, prompted this blizzard of corporate activity. The capital-raising required for the Scottish Power acquisition, for example, diluted ACS’s stake.
The Spanish company, fast establishing itself as a global leader in electricity production, now wants to pursue the IPO of the renewables division to secure funding for an ambitious expansion programme that might otherwise overstretch the parent’s balance sheet and also to crystallize value from its ownership of a leading player in the renewable sector. When it first announced the deal last May, Iberdrola explicitly drew attention to its desire to take advantage of propitious equity market conditions. And in December 2006, the IPO of EDF Nouvelles Energies confirmed the huge potential demand for renewable energy stocks when its €340 million offering was more than 30 times oversubscribed. It has since been one of the best-performing IPO stocks of the past 12 months. The leads on that deal reported huge interest among conventional large-cap institutional equity buyers as well as high-growth funds and the many specialist sustainable investment funds that have sprung up in recent years.
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Worldwide leader in wind energy with room to grow |
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Iberdrola renovables’s installed capacity and upcoming projects |
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Source: Iberdrola |
Across the globe, equity capital is being mobilized to invest in the energy sector and in a variety of sectors and types of companies all related to the environment.
Impax Asset Management is a specialist UK fund that focuses on renewable energy stocks. Its chief executive, Ian Simm, suggests that the aggregate market capitalization for what Impax loosely defines as new energy stocks stood at just $8 billion as recently as 2003, reached $58 billion in 2006 and could be more than $200 billion by the end of this year. Impax itself is growing apace. Assets under management were under $100 million in 2003 and are now on target to reach $1.5 billion.
If Iberdrola Renovables gets the go-ahead, it will be one of the leading stocks in the sector, with earnings from actual power generation sold on long-term offtake contracts, often to regional and municipal authorities, which are arguably more dependable and of better quality than the earnings of some of the new energy technology (cleantech) stocks listing on the smaller companies sections of the London, Frankfurt and Nasdaq markets.
Structural clues
Over the summer, even as financial markets panicked, Iberdrola appointed banks to lead the deal, providing some clues in the process to its likely structure. BBVA, JPMorgan, Credit Suisse, Morgan Stanley and Merrill Lynch have been appointed to work on the transaction, leading bankers to map out likely domestic Spanish retail and institutional tranches as well as an international institutional tranche, with the potential for price tension between these groups of bidders for stock. That’s the kind of structure used on the great European privatization IPOs of the 1990s and rarely seen since on a growth company flotation. It emphasizes the progress of the renewable energy companies beyond the purview of venture capital and small and mid-cap specialists and into the upper echelons of the public equity capital markets.
Iberdrola Renovables, which is already the world’s largest operator of windfarms, has total wind-power capacity of 6,826MW and aims to raise this to more than 40,000MW by investing up to €50 billion over the next five years. Investors are hot on the sector partly because it plays to the public sense of urgency about saving the planet but mainly now because returns are so good. Impax calculates that investing pro-rata in each renewable energy IPO in the past six years, including the inevitable share of failures, would have yielded a 38% internal rate of return.
George Fieger, chief executive of Contango Capital Partners, a wealth adviser serving high-net-worth American families, has been advising clients since before the summer to lighten up on equities in the expectation of a bursting of financial bubbles. He has not been advising them to quit equities entirely, rather to identify key long-term investment themes. "We’re looking for long-term value stories and we’re very bullish on energy and energy substitutes, including, for example, natural gas producers," he says. "Right now half the energy in the US is produced from coal and that’s a big polluter." Assuming it gets the go-ahead on schedule, Iberdrola Renovables will be separately listed by the end of December. Its IPO will be one of the biggest ever from Spain. Embattled Iberdrola clearly hopes its own stock will get a boost from its retained majority ownership in the division, while a sizeable free float will help attract a premium rating.