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Terna Energy | Deal sealed at €20/share

Masdar to obtain control of Terna Energy for €20/share – After more than two years of media buzz, the highly-anticipated deal for the sale of Terna Energy has been officially sealed. As per the announcement, the Abu Dhabi investment fund "Masdar" will acquire a combined stake of c65%, including GEK Terna's 36.6% and the stakes of other investors (incl. mgt) who have given irrevocable undertakings to sell their shares. The consideration settled at €20/share (on an ex-div basis). The deal values Terna Energy at a spot EV of €3.2bn, implying a 1-yr fwd EV/EBITDA of c16x, namely c28% above the peers’ median multiple, justified by the Group’s secured high-level offtake prices, its niche project portfolio, as well as by the strategic nature of the investment.

Deal to trigger a mandatory public offer – The completion of the deal is subject to fulfilment within 6 months of certain conditions including the transfer of an additional number of shares so that Masdar holds at least 67% of the voting rights in Terna Energy. With Masdar effectively having already secured c65%, the completion of the deal looks straightforward, with Masdar becoming the new majority shareholder and aiming to proceed to the launch of a mandatory public offer for the remaining shares. We expect the latter to attract substantial participation from both institutional and retail investors, as the anticipation about a potential transaction was essentially the main driving force that led to the stock's rerating from €20 in mid-2023 and >€18 recently. Although the high fragmentation of Terna Energy's free float adds a layer of complexity to the task of accumulating >90% of the shares (squeeze-out threshold), the appealing exit opportunity presented by the deal is likely to eventually prove to be the overriding driver of investors’ decision.

What does the deal encompass? – In an effort to gauge what is embedded in the deal price, we have used our own “building blocks” approach, which effectively separates the value creation into 2 components, namely: 1) a fundamental valuation component encompassing the existing capacity and projects under development totaling 3.3GW, 2) and a strategic valuation component that includes the incremental pipeline of 3.1GW (which currently lack secured connection terms or significant development progress) up to the >6GW LT target, which reflects growth optionality that a strategic investor would be willing to pay for. Our analysis indicates that the €20/share bid incorporates the value of the existing/under-development pipeline and c80% of the incremental long-term pipeline, indicating quite a compelling exit valuation.

Lowering rating to “Hold” on valuation – We lower our estimates to align with the updated mgmt guidance (FY’24e EBITDA at c€210mn, FY’26e EBITDA at the high-end of guidance at c€260mn), but raise our PT to €20.0 (from €18.0), by assigning a higher weighting to the “full” future value of the Group (to 80%, up from 50% previously) in light of the deal announced. As such, we lower our recommendation to Hold from Buy on valuation grounds. With Terna Energy shares likely to re-price higher towards the bid price, we expect the parent group GEK Terna to be the main beneficiary of the transaction given the significant cash inflow from the deal.