CLP scores in Australia

Hong Kong''s largest power group buys some of the assets it missed out on first time round, when Singapore Power bought TXU''s Australian business last year.

CLP yesterday announced that it had agreed to pay Singapore Power A$2.128 billion ($1.57 billion) for a collection of five assets, that Singapore Power had acquired last year when it bought TXU's Australian power business.

CLP will now take ownership of two core assets consisting of a 1.1 million customer electricity and gas retail business in Victoria and South Australia, and a 1,280MW gas-fired base load generator in South Australia. It will also buy three more strategic assets: the Iona gas storage and processing facility; the EcoGen Master Hedge Agreement with Babcock & Brown, which guarantees a maximum pool price of A$40 per MWH; and a one-third share of the SEAGas gas pipeline between Melbourne and Adelaide.

However, Singapore Power could still decide to keep the 33% SEAGas pipeline stake, an option that expires fives days before the completion date, which is on 31 May 2005. If it keeps this, then CLP will pay less, although according to bankers close to the deal, the amount involved is a "rounding error' on the value of the whole deal.

The sale is said to be one of the quickest M&A deals on record. Singapore Power hired Morgan Stanley on February 14th to find buyers for these assets. After two weeks of due diligence, bids came in by February 28th. After a week of negotiations, CLP signed the deal on March 7th. It is understood that around five bidders were involved, although their names have not been disclosed. However they are described as "in market players" who knew the Australian power sector and were thus able to assess the value of the business so quickly. Market sources suggest that CLP was not the highest bidder. JPMorgan advised CLP.

CLP is now talking to banks, including JPMorgan to arrange financing for the deal. The company has said that it is looking for non-recourse finance to add to its own internal resources. Together these will pay for the consideration as well as refinancing some of the debt associated with CLP's existing Australian generating company Yallourn Enegy. CLP has shareholders' funds of $5.95 billion and total assets of $8.31 billion.

JPMorgan is understood to have provided a bridge facility for the acquisition, giving certainty to Singapore Power that they would be paid. It was this certainty and a lack of conditionality on the financing that is understood to have swung the bid CLP's way. The bridge will be taken out in coming months through a non-recourse loan or bond deal.

CLP is buying strategic assets that fit well with its Yallourn subsidiary, acquired four years ago from Powergen. The acquisition allows CLP to diversify away from pure generation in Australia and become a more integrated player in the power and gas industries. It also allows the company to diversify away from its core Hong Kong market. A key strategic goal of the company is to get ex-Hong Kong earnings up from 20% of the total to 33%. Analysts estimate that this acquisition should increase its overall earnings by about HK$300 million a year, achieving its goals of increasing profits and diversifying.

"The acquisition is a realization of our business strategy in Asia-Pacific where CLP places focus on optimizing the performance of our existing assets and, where market conditions and investment opportunities permit, continuing to build meaningful and sustainable businesses in those countries," said Andrew Brandler, CLP's Group Managing Director. "Combining SPI's merchant energy business with CLP's existing 1,480 MW Yallourn power station will create a diversified energy business between retail and generation, well positioned for growth in Australia."

A slight concern is that the assets being bought had a 17% drop in profits from 2003 to 2004. Although this is partly explained by the management focus spent last year on the sale process by TXU. Recent numbers are said to be much improved.

Nevertheless, the assets CLP is buying had earnings before tax, depreciation and amortization (EBITDA) of A$181.2 million in 2004. Thus at a consideration of A$2.128 billion, CLP is paying a price of 11.7 times EBITDA. Given that at HK$44.5, CLP's share price equates to a price earnings ratio of around 13, this deal looks to be value accretive for the shareholders. That could change depending on the terms of the financing yet to be put in place.

CLP was one of the losing bidders when Singapore Power bought TXU's Australian power assets last year. When the opportunity arose to have another bite at the bid, it clearly took its chance.

Advisers close to the deal dismiss suggestions that this was a forced sale, demanded by Australian regulators in response to allowing Singapore Power to buy the TXU business in the first place. "The [regulator] had no requirements for them [Singapore Power] to sell." Instead the sale was said to be driven by Singapore Power's realization that the high level of interest in the assets by the other bidders could be translated into a profitable trade.

Given that the assets sold to CLP were not the same as the assets bought from TXU, it is difficult to know how profitable this trade was for Singapore Power, although the company is said to be "happy". Value is said to have been added by adding new customers and improving the risk management practices.

"We are pleased with the outcome of this transaction, which is in line with our strategy of staying focused on our core competencies in power transmission and distribution," said Quek Poh Huat, Group CEO of Singapore Power. "Since we assumed ownership of the SPI Australia [TXU] business last year, we have added value to it by strengthening the business processes and risk management systems, and securing new business opportunities. With the sale to CLP Holdings, the staff of MEB [the five assets being sold] will become part of a large energy business organization, which will stand them in good stead.

"The sale is an opportunity for us to achieve greater synergies within the group through financial and operational efficiencies and at the same time, maximise value for our shareholder."

In response to the transaction, S&P has put CLP on negative credit watch and Singapore Power on positive credit watch. S&P says that it is concerned that the price paid by CLP might 'result in materially weaker creditor protection levels."

For Singapore Power, S&P says that the proceeds from the transaction are likely to be used to pay down the company's existing, Australian debt, which will improve the ratio of funds from operations to total debt to around 14% in the next three years.

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