French government taps JPM amid long road to EDF restructuring

20 May 2019

The French government has mandated JPMorgan to advise on the ongoing restructuring plans for Electricite de France (EDF), which could create a path towards a potential demerger, a source close to the matter, a source familiar with the situation and a banker following the deal said.

 

According to a Les Echos report last month EDF hired BNP Paribas to advise on the planned reorganisation, which would see its hydroelectricity activities and French and UK nuclear operations grouped under a holding.

 

The French finance ministry first mooted the overhaul of EDF in 2017, which would entail a separation of its renewables, grids and retail unit into a CleanCo, following a legal separation of the two business, this news service reported in January 2018. The French government owns around 85% of EDF.

 

EDF’s management and the French finance ministry are more aligned than before regarding the reorganisation of the business, the first, and a second source familiar with the situation said.

 

EDF’s CEO and Chairman Jean Bernard Levy, has been tasked with providing a roadmap to the government by the end of the year, a second banker tracking the deal, and who is familiar with the strategy of EDF’s management, said.

 

The restructuring is unlikely to kick off before end-2019, the second banker and two sources familiar argued, as several structural issues may still have to be worked out.

 

Firstly, the company and its management committee would likely need to hash out an understanding on where the debt and pension liabilities will sit post-split, the second banker said.

 

The assignment of debt and pensions will have an impact on the two entities’ credit rating, and on the view taken by the unions, the first source familiar said.

 

EDF is currently rated A- negative by S&P, A3 stable by Moody’s and A- stable by Fitch.

 

The nuclear and hydro power Holdco and the Cleanco, which could get demerged, would have approximately the same EBITDA, according to the Les Echos report last month. EDF held EUR 33.4bn net debt and made EUR 15bn Ebitda in 2018.

 

The restructuring timing could also be at the mercy of the French political calendar, the first source familiar and a third banker following the deal said. The government has a busy pre-summer schedule including items such as European elections and pension reform plans, the first source familiar said.

 

The timing of the government’s restructuring decision might affect its public reception, the first source familiar said. The government may want the process to be less complex than the ongoing privatisation of Aeroport de Paris, which earlier this month was delayed to allow for a national referendum on the transaction, he added.

 

That said, president Emmanuel Macron may need to launch the restructuring before year-end if it is to be executed within the current presidential mandate, which ends in spring 2022, the first source said.

 

Spinning out of control

 

Assuming that the restructuring will lead to a carve-out of the Cleanco, an IPO could be a more logical option than a spin-off, the second source familiar and the second banker said. Institutional investors would likely find the business attractive, and EDF could use proceeds from an IPO to boost its balance sheet, the source noted.

 

The purpose of the restructuring is to clean up EDF’s balance sheet, improve corporate governance and make the business less reliant on state hand-outs, as reported previously.

 

Still, the potential demerger structure remains uncertain, and a spin-off might prove the easier route depending on the Cleanco’s final profile and on the views of EDF’s minority shareholders, the first source familiar said.

 

Potentially, the French government could buy out EDF’s minority shareholders as a precursor to a Cleanco carve-out, the two sources familiar and third banker said.

 

This could be costly and not strictly necessary for the separation, the second source familiar said. However, EDF’s nuclear business could be seen as unsuited to the stock market’s short-termism, and one could argue for an exit route for minorities before the restructuring fundamentally changes the investment proposition presented when EDF was part-privatised in 2005, he added.

 

A stand-alone Cleanco would compare to Germany’s innogy, when it was listed by its parent company RWE, the second banker and the second source agreed, echoing views in this news service’s previous report.

 

JPMorgan declined to comment. EDF did not respond to requests for comment. The French finance ministry redirected a request for comment to the ministry for the ecological and solidary transition, which did not respond to requests for comment.

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