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Fondul Proprietatea urges the state to analyse the risks of Hidroelectrica's acquisition of CEZ assets
Fondul Proprietatea (hereinafter “The Fund”) urges the Ministry of Economy, Energy, and Business Environment, as majority shareholder of Hidroelectrica, to thoroughly consider the risks of acquiring CEZ assets and reject the Company’s request to submit a binding offer. The Fund strongly believes that the acquisition of CEZ assets by Hidroelectrica would not create value for its shareholders and affect its listing process and potential valuation, which, in turn, would hinder Romania’s chances of being upgraded to MSCI Emerging Market status.
In our view, in its current structure, Hidroelectrica is optimally placed to overcome the current challenging environment. The Fund has previously expressed its concerns in relation to this potential acquisition and would like to stress the likely risks for Hidroelectrica and its shareholders:
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Acquiring CEZ assets risks diluting the overall value of Hidroelectrica, given that the electricity supply business and the renewables assets that are currently targeted generally have a reduced profit margin as compared to Hidroelectrica’s current hydro-power operations.
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The company has no proven track record in managing these types of assets and dealing with subsequent integration challenges. Hidroelectrica would enter the retail market, thus increasing costs and by taking over the administrative burden and financial risk of having individual clients. The energy retail market is generally more volatile and therefore riskier than the wholesale market, in which Hidroelectrica predominantly operates.
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Hidroelectrica would also take onboard the specific risks to the new business sectors. In case of renewables for example, Hidroelectrica would take over the regulatory risk related to green certificates. In our view, the discount proposed for accepting this risk is insufficient and may lead to an overpriced transaction, which would certainly be to Hidroelectrica’s detriment.
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Hidroelectrica’s IPO would be obstructed and delayed, due to the time and resources required for the integration process. The company’s attractiveness for investors and its eventual valuation may be reduced with the inclusion of the new business activities, in which it has no track record, and which could only generate limited returns.
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The value of the potential transaction is not public and shareholders cannot approve the submission of a binding offer without such an important information. Also, the final terms of the consortium contract for the submission of a binding offer that include the obligations of Hidroelectrica were not made available to shareholders.
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Hidroelectrica would become indebted following this transaction, borrowing funds to invest in lower performing sectors, thus limiting its potential to generate profits and reducing the value of dividends. Therefore, the Romanian state would risk its revenues being slashed at a time when it needs higher financial resources.
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If Hidroelectrica acquires CEZ assets, the State’s involvement in the energy sector would increase, which is contrary to the principles of liberalization.
Commenting on the proposed transaction, Johan Meyer, CEO of Franklin Templeton Investments and Portfolio Manager of Fondul Proprietateasaid: “Hidroelectrica is a highly valuable company and a unique asset not only in Romania, but also in the wider region, with significant profitability margins and a simple, sustainable business model that is focused on clean hydroelectric energy production. With its IPO in sight it, is not opportune for the company to pursue any significant acquisition which may complicate this process. By pursuing large acquisitions at this point in time, Hidroelectrica risks delaying its listing or achieving a significantly lower price, which would be value destructive for the Romanian Government as majority shareholder. It should not lose focus and rather prioritize delivering a successful listing which would be a hugely important landmark for the local capital market and the entire economy.
If it goes ahead with this transaction, over the long-term, Hidroelectrica risks reversing the progress it has made in cost-efficiency and profitability since its days of deep financial struggles.”
Johan Meyer further added: “To be clear we have always supported and continue to support investments at Hidroelectrica that are beneficial for the company and are value-enhancing, such as refurbishments that extend the lifecycle of existing assets and increase efficiency. Unfortunately, in our assessment this proposed acquisition does not meet the hurdle of generating additional value for shareholders that outweigh the risks inherent in such a transaction.”
In conclusion, Fondul Proprietatea urges the Ministry of Economy, Energy, and Business Environment, as majority shareholder of Hidroelectrica, to take into account all these considerations and to refuse support of an investment which does not clearly contribute to the overall value of the company.On the contrary, it risks depreciating Hidroelectrica’s value and may results in huge debt burdens.