Morningstar | Succesful takeover bid of CTG on EDP could imply misalignment of interests with minorities.
On May 14, 2018, China Three Gorges, or CTG, which owns 23% of EDP's capital, launched a takeover bid to acquire full control of EDP, while stating that it intends to keep EDP listed on the Lisbon stock exchange. The offer is conditional on CTG increasing its stake to at least 50% of EDP’s voting rights. CTG would then have to launch a mandatory offer for the 17% of shares in EDP Renovaveis that are not owned by EDP. The offer price of EUR 3.26 implied a decent 21% premium to our fair value estimate of EUR 2.70 per share before the deal but a limited 5.6% premium to the last closing share price.Since May 2018, the stock has hovered above the bid, based on speculation that the offer price will be raised.Before the move from CTG, we had a cautious view on EDP's outlook based on adverse regulatory backdrop in Portugal affecting both electricity distribution networks and power generation. The former form the second-largest division, while the latter comprises the third-largest division. EDP’s biggest division is renewables. Grouped in EDP Renovaveis, or EPDR, renewables are the firm’s main EBITDA growth driver due to growing capacity, especially in the U.S. The bulk of revenue is derived from regulated tariff schemes, such as purchase power agreements. Still, increasing competition at new auctions drives declining prices for new capacity PPAs, in turn dampening return on capital. The fourth-largest division is Brazil, which boasts organic growth potential despite exhibiting risks such as currency volatility and exposure to recurring drought. The dividend floor of EUR 0.19 per share looks secured by organic free cash flow generation though implying payout ratios well above the group's target in 2018 and 2019 on our estimates. The EUR 0.19 dividend implies a 5.6% yield in early September 2018, roughly in line with the sector average.EDP Energias de Portugal is a utility company engaged as a generator, distributor and supplier of electricity in Portugal, and as an electricity generation company and a gas distributor in the Iberian Peninsula. In addition, Co. is a wind power operator with windfarms for energy generation in the Iberian Peninsula, the U.S., Canada, Brazil, France, Belgium, Italy, Poland and Romania and is engaged in developing wind projects in the U.K. Co. is also engaged in generating solar photovoltaic energy in Portugal, Romania and the U.S, and in Brazil it is engaged as an operator in electricity generation. As of Dec 31 2015, Co. had 9.7 million electricity customers and 1.4 million gas customers.
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