No deal between Romania’s Electrica and Fondul Proprietatea over subsidiaries

Romanian state-controled electricity holding Electrica (BVB ticker: EL) and investment fund Fondul Proprietatea (FP) have failed once again to reach an agreement on the fund’s minority holdings in Electrica’s subsidiaries. The two sides didn’t agree on the final price of the transaction, following negotiations on Monday, March 28, 2016. The final price Electrica offered was about 11% lower than the minimum price the fund was willing to accept for the respective stakes. This was the second failed attempt at reaching a deal, after fruitless negotiations in March 2015. Fondul Proprietatea’s final asking price for the 22% stakes in Electrica Distribuție Transilvania Sud, Electrica Distribuție Transilvania Nord, Electrica Distribuție Muntenia Nord, and Electrica Furnizare was EUR 172 million. Electrica was only willing to pay EUR 153 million for the stakes The price Electrica offered was more than 18% lower compared to the value at which the four stakes are currently registered in the fund’s net asset value (NAV), as of February 28, 2016. Moreover, based on the four companies’ budgets for this year, the offer valued them at the following multiples: EV/EBITDA: 2.9x; P/E: 6x; P/RAB: 0.6x; Dividend Yield: 13.3%. “We consider that such low multiples cannot be seriously considered by any seller for such high-quality assets with strong and sustainable cash flows,” according to the fund manager, Franklin Templeton. “Sadly, despite our resilient efforts and willingness to find a realistic middle ground, it was not possible to reach a satisfactory agreement on price and conclude a deal in the negotiations with Electrica. We consider that the Fund’s offer was attractive and would have been beneficial to both parties. We remain committed and willing to resume negotiations at a future point if there is a similar commitment from Electrica,” said Greg Konieczny, Fund Manager of Fondul Proprietatea. Electrica also informed its shareholders that the negotiations with Fondul Proprietatea failed. According to Electrica’s representatives, the group offered EUR 177 million for Fondul Proprietatea’s stakes, “in line with the firm offer received from FP in March 2015”, while Fondul Proprietatea asked for EUR 196 million. However, as Fondul Proprietatea explains it, Electrica wanted Fondul Proprietatea to pay back EUR 23.7 million worth of dividends that it would receive from Electrica’s subsidiaries from the 2015 net profit, thus lowering the final price to EUR 153.3 million. Fondul Proprietatea was only willing to take the price down to EUR 180.4 million, out of which it agreed to pay back EUR 8 million, or about a third of the dividends it would receive from Electrica’s subsidiaries from last year’s profit. Electrica's representatives commented that Fondul Proprietatea's offer didn't take into account the recent regulatory changes which may impact the electricity distribution subsidiaries' activity and financial results this year. The two sides had to reach an agreement by the end of March. Both companies expressed their willingness to restart the negotiations at a later stage. Electrica and Fondul Proprietatea are both listed companies. Moreover, both are listed on the Bucharest Stock Exchange as well as London Stock Exchange. Electrica has a market capitalization of some EUR 960 million while Fondul Proprietatea is currently valued at EUR 1.95 billion (as of March 28, 2016). Electrica’s biggest shareholder is the Romanian state, which holds 49% of the group’s shares. Fondul Proprietatea is controlled by foreign investment funds, the biggest of which is the American hedge fund Elliot, with 20% of the shares.