GDF Suez is eyeing up lucrative markets
France's GDF Suez is tidying up its business, with an eye on more lucrative markets elsewhere
As Europe's crisis deepens and other developed economies stagnate, GDF Suez is concentrating its efforts on higher-growth emerging markets. A pricey consolidation of its International Power subsidiary was a key part of that.
In mid-April, GDF Suez said it had made an improved offer for the 30% stake it did not already own in its UK subsidiary, raising the price by 7% to £6.8 billion ($10.8bn). The juicy offer, almost 21% above International Power's share price before speculation about a bid began in February, was accepted.
The deal is a crucial element, believes GDF Suez, in a strategy to win contracts in emerging markets. "It is consistent with the group's strategy of accelerating its development in fast growing markets and simplifying its structure," the utility said in a statement. "It enables GDF Suez to take the full control of a unique platform for development in fast growing countries, where the group intends to significantly increase its investments in the future."
International Power has leading positions in regions that are seeing steady growth in energy demand, such as South America, the Middle East, Southeast Asia and Australia. GDF Suez said it would generate 30% of its profits from these fast growing markets, up from 23% now, and would revise upward its capital expenditure guidance within these markets to 40-50% of the group’s total gross capex in the medium term, compared with 30% today – helping to meet its target of having 90 gigawatts (GW) of installed capacity outside of Europe by 2016. Total global installed capacity in 2011 was 117.3 GW.
The reaction from investors to the final price of the stake was mixed. The rush to complete the deal, some believed, was prompted by the probability that Francois Hollande, the Socialist candidate in France’s presidential election – and a man unlikely to favour scarce cash leaving a 35% state-owned company – would win. If true, GDF Suez read the polls correctly.
Nonetheless, the utility's bond offering to raise money to finance the acquisition got a warm welcome. On 22 May, the company successfully sold a three-tranche, €3bn bond issue, the 10-year tranche of which, with a 3% coupon, was the lowest ever achieved by a corporate on a 10-year eurobond issue of this size. "The market’s extremely positive response to this issue once again illustrates its confidence in the group's long-term outlook," GDF Suez said in a statement.
Next up as GDF Suez pushes its emerging market focus is a planned disposal of some €3bn worth of assets – €10bn it pledged to sell by 2013 – to help pay for the International Power stake. CEO Gerard Mestrallet said in April he hadn’t decided all of the assets to go on the block, but alongside partner E.On Ruhrgas it plans to dispose of their 49% stake in the Slovak gas transmission system operator SPP. In May, the French utility also complied with Bahraini regulatory requirements over concentration of ownership and sold a 40% stake in the country's al-Hidd power and water plant to Malaysia's Malakoff.
Meanwhile, the change in focus is plain in GDF Suez's results. In the first quarter, core earnings rose 5.7% on the year to €5.8bn, largely down to growing demand at its gas business and International Power's new projects in those emerging markets, as revenues in the quarter increased 10.5% to €28.2bn.
Revenues in the company’s international business rose by 14.4% to €4.2bn on the back of contributions from International Power assets purchased in early 2011 and growth in Latin American and Asian regions. International Power said a slight drop in North America, Australia and UK-Europe sales during the quarter was offset by a 16% rise in Latin America and a 22% rise in Asia.
The global gas business, including upstream and liquefied natural gas (LNG), also did well in the first quarter, with revenues rising by 69.8% on the year to €1.3bn. Production rose by almost 4% to 16.1 million barrels of oil equivalent (boe), meaning that since 2007 it has grown 42%. LNG sales rose by 7 terawatt hours (TWh) to 16 TWh (from 468.3 tonnes LNG to 1,079.4 tonnes), with two-thirds of cargoes going to Asia, double the number sent to that region in the year-earlier quarter. Much of this was down to Japan, which imported a record 83.2m tonnes in the fiscal year ended March as its nuclear facilities were shut down. GDF Suez forecasts gas consumption will increase 3.5% annually in Asia's developing economies, particularly China.
And while revenues from other segments also rose, GDF Suez’s European energy business results yielded some concern for investors.
Although revenues at this division climbed by 8.3% to €14.6bn in the first quarter, the "erosion of the portfolio", in the utility's words, was offset by the cold weather conditions, which boosted demand. As France's former gas monopoly, GDF Suez still has a share of around 87% in the household market and 63% in the business market, but this is under threat as the European crisis takes its toll on demand, competition heats up and regulatory issues intrude; in 2011, this division saw a 50.7% fall in Ebitda.
Further, there remains a big question mark over GDF Suez's nuclear business in Belgium, which comprises seven nuclear reactors at two plants operated by its Electrabel subsidiary. Nuclear energy made up 10% of GDF Suez's generation capacity in 2011 (compared with 55% for gas), though the Belgian government proposed last year raising its nuclear tax and exiting nuclear power altogether by 2025. Following the release of the first-quarter results, GDF Suez vice-chairman Jean-Francois Cirelli said GDF Suez plans to publish a review of its nuclear strategy by the middle of this year.
Yet despite weaknesses in some parts of GDF Suez, its diversification across business lines is what attracts investors. Out of the 20 research houses listed as covering GDF Suez, just two offered an "underperform" rating of the stock. It is the biggest independent power producer in the world and holds the top spot as a non-nuclear energy producer; in the gas segment it is the largest importer of LNG in Europe and the largest storage operator; it holds the largest gas transmission and distribution network in Europe; and it is the largest European supplier of energy and environmental efficiency services and second largest of supplier of water and waste services worldwide. "GDF Suez's excellent business risk profile is supported by the group's scale and diversification as one of the world's largest gas and electricity utilities and its strong competitive position in most of the markets where it operates," said Nicolas Riviere, an analyst at Standard & Poor's, which gave an A-rating to the firm. "We expect GDF Suez's operating performance in 2012 to remain resilient to depressed conditions in its European energy markets, thanks to its wide business and geographic diversification."
For 2012, GDF Suez said it expects net recurring income to grow to between €3.7bn and €4.2bn from €3.5bn last year, with the extra stake in International Power contributing €200m to that. "International Power remains confident of delivering further growth in 2012, driven by full-year contributions from new plants that became operational in late 2011 as well as new capacity that is expected to come on line during 2012," said Tina Cook, an analyst at Charles Stanley, a brokerage.
Cook listed progress on the major construction programme with several projects entering commercial operation (2,368 MW net expected to come on line in 2012 with 3.5 GW net of capacity expected to be operation by 2014). "In addition to the construction programme, International Power has a substantial development pipeline of 6.5 GW net, which is largely located in faster-growth emerging markets," she said.
Ultimately, this is what Espirito Santo's Lawson Steele reckons sets GDF Suez apart from its peers. "The distinguishing feature of GDF Suez compared to other peers like RWE and E.On, is that the others have aspirations to grow internationally, whereas GDF Suez are already there – they have significant presence, they have history, and are therefore quite a different animal."