Monday, December 10, 2007

Iberdrola's public offering

There's a lot to unpack in the upcoming 20% spinoff of Ibedrola's clean energy unit. First some details:

Spanish power company Iberdrola SA's plans to sell 20% of its clean-energy unit in a pricey public offering this week that will shed light on whether "green" energy is the real deal or just a fad. The company has placed a preliminary value on the unit, Iberdrola Renovables SA, at €22 billion to €29.6 billion ($32.2 billion to $43.4 billion), making it the largest green-energy stock-market debut ever and a litmus test of investor appetite for alternative power, such as wind or solar.
VCs and private equity shops rely heavily on IPOs to harvest the value of their investment and their extensive time commitment. These investors, especially mid-to-late stage, put a lot of weight behind the success or failure of recent IPOs, especially when advising other portfolio companies in similar industries and in making new investments. While there have been a number of successful solar IPOs this year and Photon's solar index has risen 119% in the past 12 months, the fear, given the incredibly high multiples of these companies, is that what goes up (and up and up) must eventually come crashing down. A poor showing could theoretically give some investors pause, especially if they are "'short-term' tourists".

There are several issues that I'm either curious about or give me pause:
  • Reports have the valuation of the Iberdrola Renovales at 100 times PE (if the offering price hits the top-end). This compares to traditional U.S. electric utilities with PEs in the 6-15 range. Iberdrola may be a whale (largest wind power operator globally) in the hottest industry since the Internet circa 1999, but it's still only in the business of generating and selling power. And at a cost premium to coal and natural gas. Certainly the market values high growth over maturity. But still...
  • What is the capital being used for? New Energy Finance pegs the capital raised between $6.6 billion and $8.8 billion. Is this going for acquisitions? Internal growth strategies? R&D? Getting returned to shareholders? Is Iberdrola trying to get ahead of a perceived consolidation in the wind industry? Or is it getting out while the going's good?
  • Iberdrola Renovable's primary clean tech focus is wind. The same NEF report points out the following:
Other wind power firms have found it difficult to command market attention this month - only last week, Italian firm Fri-El Green Energy confirmed that it had put on ice its own plans for an IPO to raise up to $676 million, and another Spanish firm, Eolia Renovables, announced that it had pushed its flotation back to January.

From my perspective, this could be a result of months of market turmoil, concern over climate negotiations, or just an undersubscribed offering. But it may be something to watch.
  • Other European utilities will be watching the results of Iberdrola's spin off closely. Acciona Renewables and Endesa (controlled by Enel) recently got into bed together under very clean, green sheets, and both Enel and Acciona have recently taken significant interest in the U.S. recently, investing heavily in renewables. It will certainly be interesting seeing where their next steps take them.
Ultimately, all of my caveats and concerns may be irrelevant. Global energy demand continues to grow unabated, and will continue to do so over the next decade, in the U.S. (where Iberdrola is heavily exposed), China, India or rest of the developing world. As carbon prices rise, environmental concerns multiply, and the $/watt cost of installing wind drops, no doubt Iberdrola will be extremely well-positioned to grab some of the hundreds of billions of dollars that will inevitably flow into this industry.

Moreover, there is a lot of institutional money on the sidelines, desperate for solid, mainstream plays that they be involved in. I recently heard about the story of one very large US investment fund demanding that
one of its investment mangers immediately invest several hundred million dollars in clean energy in a particular emerging market, despite neither of them having any experience in the space. The fund just wanted to be involved in anything.

Finally, given their location and policy environment, European investors (especially institutional) may have a much different perspectiv
e than U.S. investors when it comes to clean energy, and may be more willing to support the first few offerings. To close on one:
"We'd be willing to pay a premium to get the market leader" in renewable energy, said Treasa Ni Chonghaile, a fund manager at KBC Asset Management International Ltd. in Dublin, which manages the $82.5 million Calvert Global Alternative Energy Fund, already a holder of Iberdrola stock. "Its exposure to high-growth markets, especially the U.S., should give it higher multiples than other developers."
UPDATE: I took out two graphs because they made no sense and added nothing to the post.

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