European Event-Driven Analyst

Jesus Rodriguez Aguilar

Jesús is an Insight Provider (Event-driven) on the Smartkarma network, where he looks across sectors at opportunities arising from securities mispricing (both credit and equity), share classes, bid announcements, prospective bids, and special situations. He has served as Economic and Business Advisor at the Spanish Congress in Madrid. Prior to that, he has worked in the City of London: as a Credit Analyst at Bloomberg; Event-driven associate at former boutique European Research; and doubled as Special Situations and Equity-linked VP (convertible bonds) at Merrill Lynch. Jesús has an MBA from the London Business School, a BA (Hons.) degree in Economics from the Complutense University in Madrid, and a BA (Hons.) in Law from U.N.E.D., also in Madrid.

IFM/Naturgy: Tender Results & Ibex-35 Index Implications

Selected European Holdcos and DLCs: December '21 Report

Event-Driven

There have been some important regulatory changes included in the royal decree issued last week, as the Spanish Government uses demagogy and asks for a "social contribution" from utilities to compensate households from the escalation in amount of the electricity bill in Spain.
The negative impact of those regulatory changes on <a href="https://www.smartkarma.com/entities/naturgy-energy-group-sa" target="_blank" data-smartkarma-citation="entities:21271:1" rel="noopener">Naturgy Energy Group SA (NTGY SM)</a>'s income is estimated at around €350 mn, equivalent to 9.2% of 2021e EBITDA and 15.5% of net profit. Nevertheless, the takeover offer has supported Naturgy's share price, in contrast to the strong cuts suffered by <a href="https://www.smartkarma.com/entities/endesa-sa" target="_blank" data-smartkarma-citation="entities:21264:1" rel="noopener">Endesa SA (ELE SM)</a> (-11% in four days) and <a href="https://www.smartkarma.com/entities/iberdrola-sa" target="_blank" data-smartkarma-citation="entities:21276:1" rel="noopener">Iberdrola SA (IBE SM)</a> (-8.8%). See charts in the Insight.
The Board of <a href="https://www.smartkarma.com/entities/naturgy-energy-group-sa" target="_blank" data-smartkarma-citation="entities:21271:1" rel="noopener">Naturgy Energy Group SA (NTGY SM)</a> considers the consideration offered by IFM as "fair", but highlights that the top shareholders will not tender their shares, neither will the Board members, nor will the treasury shares or those held for management compensation be tendered. The Board does not make any recommendation to shareholders to tender. The Board also underlines the negative impact of the takeover bid on the company's corporate governance. The Board thus throws the gauntlet at IFM.
There are four possible bid outcome scenarios:
<ol class="">
<li>
IFM withdraws the bid prior to the end of the offer period "when, due to exceptional circumstances" as per art. 33, sec C of the Takeover Code. The current energy reform undertaken by the Government could support this claim. Probability is very low.</li>
<li>
IFM does not reach the 17% minimum acceptances threshold (although it could hypothetically agree to a 10% threshold) and withdraws the bid. Share price would likely fall.</li>
<li>
IFM achieves its objective without improving the current offer price. The gain is small: gross spread is 2.7%, but there is the risk of apportionment (25% of the share capital could potentially tender), and the share price post-bid could be negatively affected by lack of liquidity. Governmental intervention in the energy market constitutes a good argument for the bidder not to sweeten the offer and also an incentive to tender, in anticipation of a downward adjustment of the post-takeover share price.</li>
<li>
IFM improves the offer. In this case, I do not think that the improvement would be very significant (less than 5%) with a low probability, in my view.</li>
</ol>
I do not see an interesting option holding the shares until the end of the acceptance period (8 October), considering the risks. It could potentially be interesting to stay up to five calendar days before the end of the acceptance period (2 October), in case there is an improvement in IFM's offer during this period and sell upon the news. The option of holding the shares and not tendering them entails a risk of illiquidity (the free-float could be greatly reduced) and the potential for revaluation in the medium term is not excessively attractive (median TP on Capital IQ consensus is €22.37), albeit the dividend yield is c. 5.6%.

There have been some important regulatory changes included in the royal decree issued last week, as the Spanish Government uses demagogy and asks for a "social contribution" from utilities to compensate households from the escalation in amount of the electricity bill in Spain.
The negative impact of those regulatory changes on Naturgy Energy Group SA (NTGY SM)'s income is estimated at around €350 mn, equivalent to 9.2% of 2021e EBITDA and 15.5% of net profit. Nevertheless, the takeover offer has supported Naturgy's share price, in contrast to the strong cuts suffered by Endesa SA (ELE SM) (-11% in four days) and Iberdrola SA (IBE SM) (-8.8%). See charts in the Insight.
The Board of Naturgy Energy Group SA (NTGY SM) considers the consideration offered by IFM as "fair", but highlights that the top shareholders will not tender their shares, neither will the Board members, nor will the treasury shares or those held for management compensation be tendered. The Board does not make any recommendation to shareholders to tender. The Board also underlines the negative impact of the takeover bid on the company's corporate governance. The Board thus throws the gauntlet at IFM.
There are four possible bid outcome scenarios:


IFM withdraws the bid prior to the end of the offer period "when, due to exceptional circumstances" as per art. 33, sec C of the Takeover Code. The current energy reform undertaken by the Government could support this claim. Probability is very low.

IFM does not reach the 17% minimum acceptances threshold (although it could hypothetically agree to a 10% threshold) and withdraws the bid. Share price would likely fall.

IFM achieves its objective without improving the current offer price. The gain is small: gross spread is 2.7%, but there is the risk of apportionment (25% of the share capital could potentially tender), and the share price post-bid could be negatively affected by lack of liquidity. Governmental intervention in the energy market constitutes a good argument for the bidder not to sweeten the offer and also an incentive to tender, in anticipation of a downward adjustment of the post-takeover share price.

IFM improves the offer. In this case, I do not think that the improvement would be very significant (less than 5%) with a low probability, in my view.

I do not see an interesting option holding the shares until the end of the acceptance period (8 October), considering the risks. It could potentially be interesting to stay up to five calendar days before the end of the acceptance period (2 October), in case there is an improvement in IFM's offer during this period and sell upon the news. The option of holding the shares and not tendering them entails a risk of illiquidity (the free-float could be greatly reduced) and the potential for revaluation in the medium term is not excessively attractive (median TP on Capital IQ consensus is €22.37), albeit the dividend yield is c. 5.6%.

IFM/Naturgy: Board Opinion And Bid Scenarios