Morningstar | Partnership Between Engie and EDP Reflects Size Importance in Fast Growing Offshore Wind Market
Engie and EDP announced on May 21 the signing of a strategic Memorandum of Understanding, MoU, to create a joint-venture in offshore wind in which they will combine their offshore wind assets and projects. We think this deal is strategically bold and that the historic partnership between the two groups limits integration risks. We leave our fair value estimates unchanged and reiterate our no-moat, stable trend ratings for both.The combined offshore wind portfolio of EDP and Engie consists of 1.5 GW of projects under construction and 4 GW under development on a gross basis. The two groups' net contributions are equal in terms of projects under construction. The two companies argue that they will be able to grow their asset base more quickly thanks to the greater scale. Accordingly, they set a target of reaching 5 to 7 GW of projects in operation or construction and 5 to 10 GW under advanced development by 2025. They primarily target markets in Europe, the U.S., and Asia.
The new entity will be the fifth-largest global player behind Orsted, RWE pro-forma, Vattenfall, and Iberdrola. We believe that involves a separation between a group of Tier 1 leaders and secondary players like Enel, EDF, and SSE, which could be marginalized.
We view the JV creation as a bold strategic move chiefly due to larger scale. We do think scale matters to tap offshore wind growth outside Europe and against an increasingly competitive backdrop reflected by the entrance of large E & P companies. EDP will bring its global footprint, especially in the U.S. with the 1.5 GW Mayflower project under development in which it partners with Shell. Engie will bring exposure to Germany with the Seamade project under construction. On the other hand, we see limited room for cost synergies as evidenced by the upcoming combination of Innogy and E.On's renewable assets whose synergies targets are not significant.
EDP and Engie have been cooperating since 2013 as consortium partners in French offshore wind projects Le Tréport and Noirmoutier currently under development and in the Morey East project under construction in the U.K. That mitigates integration risks between the different teams in our view. Besides, the two groups target a full implementation of dedicated team and joint operations by year-end.
Based on the additional capacity targets in 2025 and beyond and taking Engie's investment criteria, namely internal rate of return 200 basis points above WACC, we calculate potential value creation of EUR 0.7 per Engie share, 5% of our fair value estimate, and of EUR 0.4 per EDP share, 12% of our fair value estimate.
Engie is an industrial group, based in France, active in the fields of gas, electricity, energy services and the environment. Co. is an energy provider across the entire energy chain, in electricity and in natural gas, including: purchase, production and commercialization of natural gas and electricity; transport, distribution, management and development of major natural gas infrastructures; design and commercialization of energy services and environment-related services. Co.'s activities are conducted through five segments: Energy Europe, Energy International, Global Gas and LNG, Infrastructures, and Energy Services.
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