A reported bid for U.K. nuclear power generator British Energy Group PLC (BGY.LN) by RWE AG (RWE.XE) could make strategic sense and would be in line with the German company's goal of improving its carbon dioxide emissions profile, analysts say.
Europe's largest corporate emitter of CO2, RWE has pledged to boost investment in an effort to lower emissions by 60 million tons annually by 2015, as the cost of CO2 trade eats into its profits.
Analysts say a potential bid for British Energy would help RWE to lower CO2 emissions and increase its involvement in nuclear energy at a time when the company is having to shut down a considerable part of its German nuclear fleet.
An acquisition of British Energy would also contribute to RWE's stated target of increasing its debt leverage, analysts say.
However, some warn that RWE could be taking on considerable operating risks through its acquisition of British Energy, which has an aging and troubled nuclear fleet, adding that the move is reminiscent of the German firm's previous ill-fated mergers and acquisitions in the U.K., such as its 2001 purchase of Thames Water.
The comments have come in response to a report in Wednesday's Financial Times saying RWE made an indicative cash offer for British Energy several weeks ago at close to 700 pence a share. The deal would value British Energy at around GBP11 billion.
Both RWE and British Energy have declined to comment on the report.
However, a person familiar with the matter told Dow Jones Newswires that RWE's supervisory board last month approved in principle a bid for the 35% stake in British Energy held by the U.K. government. The person declined to provide details about the price that RWE is willing to pay.
"I think a bid for British Energy by RWE would make a lot of strategic sense for the company," said Sal. Oppenheim analyst Matthias Heck. "RWE's German nuclear power plant fleet is rather old and the company soon has to start shutting down a considerable part of its nuclear reactors."
Germany has committed to close down all of its nuclear plants gradually by around 2021, with RWE's 1.2 gigawatt Biblis A reactor next to be decommissioned. The reactor is officially due to be shut down in fall 2009.
However, in light of its CO2 reduction targets, RWE is keen to retain its nuclear expertise and a bid for British Energy would help achieve this, Heck said.
He added that a successful bid for British Energy would put RWE in a good position in terms of new-build nuclear projects in the U.K., as British Energy owns some of the most favored sites for new nuclear reactors in the country.
RWE has earmarked around EUR5 billion for investment in the U.K., mainly to be spend on renewable energy generation and more than 3 gigawatts of combined-cycle gas turbine power plants. However, the company has also said it is targeting participation in at least two U.K. nuclear projects.
RWE is already a major player in the U.K. power market with its RWE npower unit, which has around 6 million customer and a power generation capacity of more than 8 gigawatts.
A successful bid for British Energy could turn out to be "quite favorable" in the medium term, said Dexia analyst Steven de Proost, as it would "substantially reduce RWE's emission rates and as a result it could entail higher multiples going forward."
Analysts also said RWE shouldn't have any trouble financing an acquisition of British Energy.
"RWE is virtually debt free at the moment," said Sal. Oppenheim's Heck. The company wouldn't have to raise additional cash - for example via a capital increase - and a bid for British Energy could help RWE reach newly declared leverage targets, he added.
In late February, RWE revealed plans to optimize its balance sheet by taking on more debt. By 2010, the company plans to reach a net debt level of between 2.8 to 3.4 times its earnings before interest, taxes, depreciation and amortization, or Ebitda. RWE said at the time that it intends to reach this target by boosting capital expenditure, as well as carrying out selective mergers and acquisitions and shareholder returns.
In 2007, RWE's net debt was EUR16.93 billion while Ebitda came in at EUR7.94 billion, equating to a leverage factor of 2.1.
The report of RWE's indicative bid for British Energy has sparked fears of a possible bidding war.
Other potential suitors for the U.K. company include state-owned Electricite de France (1024251.FR), Spanish utility Iberdrola (IBE.MC), German company E.ON AG (EOA.XE) and Centrica PLC (CNA.LN).
Dexia's de Proost, however, said he believes a full-cash offer for 100% of British Energy "could frighten other operators" away from launching their own bids, as it seems that Iberdrola, EdF and Centrica have only show interest in buying parts of the company.
Sal. Oppenheim analyst Heck said "RWE might pay the highest strategic premium" given its strong interest in retaining its nuclear energy expertise after German's planned exit from the sector.
The Financial Times article noted that EdF Energy, the U.K. arm of EdF, had initially made an offer to buy only part of British Energy, because it was reluctant to buy the nuclear generator's aging advanced gas-cooled reactor.
"RWE being willing to take that risk in addition to the political risk could raise a few eyebrows," said Dresdner Kleinwort analyst Lueder Schumacher in a research note.
He added that investors are "likely to be mindful" of the fact that the big acquisitions RWE has made in recent years - such as the Thames Water purchase - didn't create "spectacular amounts of value or shareholder returns."
RWE sold Thames Water to Kemble Water Ltd., a consortium led by Macquarie's European Infrastructure Funds, in late 2006 for GBP4.8 billion in an effort to refocus on the energy business.