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PUBLIC POWER CORPORATION (PPC) | Powering Up: Expanding into the Balkans with Enel Deal

PPC acquires Enel’s activities in Romania – PPC announced today that it has reached an agreement with Enel for the acquisition of the latter’s activities in Romania. The enterprise value of the deal has been agreed at €1.9bn, with the equity value at €1.26bn. The transaction is expected to be completed by Q3 2023, subject to regulatory approval, while it includes an earn-out mechanism based on future value uplift for the supply segment. The deal signifies the start of PPC’s expansion into the Balkans, in an effort to capture regional growth and interconnection opportunities.

Transaction Perimeter: What is PPC buying? – The deal includes Enel's electricity distribution and supply activity, as well as its RES business in the country. Enel Romania: 1) owns majority stake in two electricity supply companies with a combined customer base of c3.2mn (c18% mkt share), 2) has majority stake in three electricity distribution companies with combined a RAB of €1.15bn, 3) operates 534MW of RES and has a pipeline of 5.4GW of RES projects in various stages of development. Overall, combined EBITDA from all businesses has been on a downward trajectory, from €310m in FY20 to negative €26m in 9m 2022, as regulatory interventions across several activities (supply, grid) have more than offset the Group’s healthy growth from RES projects (run-rate 2022 RES EBITDA at c€150mn vs €79mn in FY 2020). That said, Enel has indicated the negative regulatory impact is to be recovered in Q4’22.

Deal rationale – The acquisition of Enel's activities in Romania will enable PPC to expand in the broader Balkans area and become a key player in the region. Alongside geographical diversification, the acquisition will also allow PPC to reach faster its RES goal of 5GW by 2025, given the significant RES assets in operation and the considerable pipeline of renewable projects included in the deal. PPC’s regional expansion also makes the Group’s RES target look more achievable, given the limited space for significant additional capacity installations in Greece. From a valuation perspective, the relative acquisition valuation of Enel Romania looks compelling across all segments (RES EV/EBITDA at 5.5x, Networks EV/RAB at 0.88x).

Our concerns: regulatory risk - While the acquisition will undoubtedly facilitate PPC's regional expansion, we do have some concerns regarding the regulatory regime in Romania having in mind windfall taxation for RES, caps on supply tariffs and the burdening of distribution companies with the cost of network losses at merchant prices exposing them to market risk. Therefore, the acquisition raises the regulatory risk profile of the group and, as such, we argue that PPC will need to carefully navigate the regulatory landscape to realize the full benefits of the acquisition.

Low valuation largely de-risks the deal; valuation uplift depending on execution – Overall, we view the low deal valuation as largely reflecting the embedded regulatory risk, thereby indicating a positive risk-reward skew assuming the regulatory environment in Romania normalizes. On our initial calculation, the deal valuation points to >20% value crystallization taking into account the optionality from the RES pipeline. We stress our published numbers do not yet incorporate the impact of this transaction, while provisional 2022e figures indicated in PPC’s presentation point to EBITDA of €0.9bn and net debt €1.4bn in 2022e, i.e. better than our numbers.