Friday 19 January 2018

Emmet Oliver: Rabbitte's strategy on ESB is getting ever more mysterious

Emmet Oliver

In his apparent desire to avoid Eircom Part 2, Pat Rabbitte's strategy in relation to selling ESB is becoming more puzzling by the day.

The process, which will drag on into next year, is only starting, but the early steps Rabbitte has taken has probably knocked several million euros off the price the Government is likely to achieve.

First we were told the ESB's networks unit would not be part of the sale. This is going to be a critical decision in terms of price for the Government. The networks unit, which operates on arm's length basis from the ESB Group, makes up half the €12bn asset base of the company.

It is a regulated monopoly, but a monopoly nonetheless.

The remaining non-network segments of the business are not monopolies and hence not as attractive.

This represents discount number one on the price the Government will get.

In what will be a strange and awkward transaction, buyers are instead being asked to purchase a minority stake (probably uo to 30pc) in those remaining businesses, i.e. the ESB Group. This minority stake will create another critical reason for the price to be discounted -- strategic control of this non-networks business will be retained by the ESB Group, i.e. the Government.

The staff shareholding, which comes to 5pc, will also be retained. In other words, the Government and the staff will have a blocking stake, meaning that the minority shareholder will have to trust them to grow the value of the business, with their only influence a few tokenistic board seats.

Maybe the value will grow, but private equity buyers work off a 12pc return on equity and would these buyers trust the state and the unions to deliver such a return consistently?

Discount number three arises because there is no obvious route for a buyer to sell on the stake while it remains in state ownership.

Clearly a float somewhere down the line cannot be ruled out, but the absence of such a liquid exit route from the start is also likely to pull the price down.

The other problem at the outset is that trade buyers -- like EDF and E.ON -- are unlikely to bid, at least aggressively, for a minority stake.

A deal to buy the ESB, headed up by chief executive Padraig McManus, makes more sense for them if they can link ESB into their main companies, benefiting from synergies and bulk-buying.

Many of these big European utilities have power plants in countries where ESB International also has assets -- one thinks of Spain, for instance.

But they would presumably prefer to buy these mainly modern plants in those countries in their entirety, rather than taking a small less-than-strategic stake in a state-controlled utility.

With discounts abounding under the current plan, one wonders would an easier route not be to simply sell off the ESB's entire generation arm and overseas assets?

That way a decent price is preserved and the networks are kept away from the so-called vultures.

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