Brave Investors: Long Engie And Short Electricite De France
The French state is looking to broker a deal for EDF to buy Areva’s entire nuclear reactor business. There is risk that EDF pays a high price in many ways. There is a possibility of a deal with Engie for just the installed reactor maintenance business. A deal involving Engie would be better received by the markets and see upside on all names. Anything else means downside on all companies involved – except Engie. A purchase of the bulk of Areva’s ( OTCPK:ARVCF ) nuclear reactor and engineering business by Electricite de France, or EDF ( OTC:ECIFF ), is currently favoured by the state. But a purchase of the maintenance business by Engie ( OTCPK:GDFZY ), would be a more favourable outcome for all parties involved, investors included. On the issues concerning EDF, also see my previous SA article, “Electricite de France SA And A Potential Areva Deal – Nuclear Champion Or Explosion?” The French state is reported to be pushing for Electricite de France to acquire Areva’s nuclear reactor and engineering businesses . The broad outline has been known for a while. Now, EDF is said to be finalizing an offer. Press reports suggest Area is looking for Eur 1bn (USD 11bn) or just the engineering business. A Eur 300m (USD 337m), EDF’s valuation is considerably lower. That compares to market valuations floating between in a Eur 1.5-3bn (USD 1.7-3.4bn) Range for the reactor business. I estimate an implied EV/Sales range of 1.1-2.1x on that basis. But, on those revenues come the risks and liabilities which are highly uncertain. Engie might emerge as a strong competitive bidder. The CFO recently confirmed potential interest. Engie seems to be interested in the reactor maintenance business, which it could be valuing at around Eur 3bn (USD 3.4bn). That would imply just short of 2x sales, which is reasonable for a high margin and stable cash flow business. In my view, a deal with Engie would be in the interest of all parties involved. Even the state could find reassurance, given its holding in Engie. It would be much better received by markets, too. EDF would benefit from vertical integration, a potentially more streamlined and efficient new build operation, and all in all lower future costs of its nuclear fleet. Conversely, the reactor build business its outside of its core business and expertise. Lastly, a deal would not be helpful for EDF’s cash flow as it is already capex strained. An EDF deal might not provide enough funding to Areva. The government might look for a more complex solution with Chinese investors. Engie has existing expertise in large utility engineering through Tractebel and its energy engineering and services business. The nuclear maintenance business could tie in well with that. There would be much less of an issue with providing the service to competitors than in the case of EDF. Engie’s business does that already. The company would also derive synergies with its own large fleet of operational nuclear reactors. Investors are prepared for M&A from Engie, following recent management comments. I gage a deal would, contrary to EDF, be perceived as coming from sound management rationale, and given all indications, free from political pressures. Brave investors might consider a long Engie/short EDF trade as the downside on Engie, irrespective of the outcome, is limited. 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: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.