City analysts have admitted that the premium SSE achieved in selling its stake in SGN exceeded their expectations.
Yesterday SSE revealed it had agreed to sell its remaining 33 per cent holding in the gas distribution network operator to a consortium of Canadian investment funds for £1.2 billion.
Abu Dhabi Investment Authority, which acquired a 17 per cent stake from SSE in 2016, also sold up to the same buyers – Ontario Teachers’ Pension Plan (OTPP), an existing investor in SGN, and Brookfield Super-Core Infrastructure Partners.
The deal represents a premium to the regulated asset value (RAV) of 36 per cent, although this could be slightly lower if non-regulated business is excluded from the calculation.
However, analysts at Barclays and Investec said they had modelled lower numbers.
Martin Young, of Investec said his sum-of-the-parts valuation of SSE’s stake in SGN had indicated a 15 per cent premium to RAV and yesterday’s deal therefore represented a value £421 million higher.
He told Utility Week the deal showed that while gas assets may not be as highly sought after as other regulated utilities, their attractiveness should not be overestimated.
He said: “National Grid’s acquisition of Western Power Distribution (at a premium of c60 per cent) was probably an outlier in the current market. I would expect a regulated asset put up for sale in the current climate to be achieving between 30 to 40 per cent. This is comfortably within that.”
Asked what this means for National Grid’s sale of its gas transmission arm, the process for which is due to begin later this year and to conclude in 2022/23, he said “I think they will see this as a positive”.
Young’s sum-of-the-parts model for National Grid Gas indicates a 17 per cent premium to RAV of £7.4 billion if the entire business is sold or 40 per cent based on a 51 per cent stake.
Barclays’ Dominic Nash had predicted SSE would get a 30 per cent premium to RAV and said: “While this deal doesn’t compare to the 50 per cent+ premiums to RAV the gas sector would have seen in the past, I think this is a decent price.”
He pointed out that the deal had also been reached much quicker than anyone was anticipating. SSE had previously guided that the process would kick off in mid-summer, with an announcement by the end of the year. He speculated that OTPP, which already owned a 25 per cent share in SGN, had rapidly exercised pre-emption rights, meaning that an auction process was unnecessary.
He agreed with Young that the attractiveness of gas assets to investors may have been underplayed.
“Natural gas is likely to be with us for a long time and there’s clearly going to be some structural growth if hydrogen becomes a major energy source.
“It’s going to take a long time to get a clear picture around hydrogen, and I don’t anticipate the hydrogen strategy providing significant clarity, so I don’t expect that was a huge factor here. I think it’s more the fact that there’s a clear role for these assets for some time to come and these are investors who know that market.”