Scalper1 News
EDF has outlined the terms of its acquisition of Areva’s nuclear reactor business. There will be relief on confirmation that EDF is sheltered from legal risk on legacy projects and on confirmation the deal will be cash flow neutral. Investors should consider covering shorts on EDF for the short term, but for long term exposure to the nuclear theme, I prefer Engie. There will be relief on the news: EDF (OTC: OTC:ECIFF ) has sheltered itself from the major risks related to Areva’s reactor business. Strong nuclear performance in H1, in line results and reiterated guidance will also contribute to some improvement in sentiment. One of my big concerns, overhang from the Areva (OTCPK: OTCPK:ARVCY ) deal, is removed. Still, execution risk has increased without a doubt. Some short covering may be advisable, but for long exposure under the nuclear theme I prefer Engie (OTCPK: GDFZY ). In a politically orchestrated transaction, EDF is stepping in to rescue Areva, the loss making integrated French nuclear company. Areva is active in mining, nuclear fuels and nuclear engineering. Amongst other issues, delays and execution issues on new build projects have led to a situation where Areva needed re-capitalisation. EDF’s offer was announced some weeks ago. EDF’s core business is power generation and supply. It runs France’s nuclear power generation. The two companies have been in an uneasy partnership for new nuclear development for a long time. I have previously argued that the EDF’s acquisition of Areva’s reactor business substantiates the market’s perception of government intervention in EDF’s strategy, strains the company’s finances and does not provide synergies but rather risk to the core business. I stand by all of these points, albeit there is some relief on the financial issues from the detail of the terms of the deal (see below). EDF has now outlined the terms of the Areva deal . It will acquire 75% of Areva’s reactor business for Eur 2.7bn (USD 2.96bn). As per the previous numbers, this implies a take-out multiple of 0.75x sales. EDF will submit a binding offer in Q4 15 and is looking to close the deal in H1 2016. According to EDF, the deal will be cash flow neutral in 2018. A new dedicated joint venture to be held 80% by EDF and 20% by Areva will be set up for new reactor exports. I see that as a positive for streamlining and efficiency of the international business. EDF is looking to bring in partners so that eventually it may own 51% of the business. Note, however, that there will be a three way management situation. EDF’s majority ownership gives some comfort in terms of efficiency as far as control goes. Management has said it has already received indications of interest . We would not be surprised for such interest to come from potential Chinese partners. The big relief is that EDF is completely immune from all risk relating to the Finnish project. It is also a positive that it will be in full control of the Flammantville and Chinese projects. That should help with execution, which I see as the key element for success in new nuclear. Along with results in line with guidance (net income Eur 2.5bn (USD 2.7bn), flat y/y) and reiterated guidance (nuclear output 410-415TWh), all of the above should lead to a relief reaction on the share price. If indeed Chinese partners were to enter the EDF/Areva venture this could bring the global nuclear sector down a path that I have anticipated for a while: Chinese project execution skills could reduce risk and with it the cost of new nuclear. Chinese managers and developers would become more important in the nuclear sector globally. New nuclear might become more viable from a cost perspective. Investors might be well advised to consider some short covering over the short term. I do not see the fundamentals strong enough for long exposure, though. For those looking for a true beneficiary of the theme of Chinese involvement in nuclear and long term cost reduction, I prefer Engie (see my previous article, ” Long Engie/Short GDF On More Fundamentals Of Engie “). Engie, the integrated gas and power company, has a very strong engineering arm and a proven track record of large scale power plant development of all fuels. Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Scalper1 News
Scalper1 News