State sell-offs on the back burner after gas failure

At about 9am on Wednesday, Bord Gáis Éireann's adviser, Royal Bank of Canada, called the three remaining bidders for the group's retail division and told them that the Government would shortly announce that its sale was being pulled.

The news came as no great surprise when it broke shortly afterward. The sale ultimately failed to attract the level of interest thought possible when the business was formally put on the block last spring. Big global utilities such as GDF Suez and E.ON all expressed initial interest but ultimately declined to go any further

Malaysian operator Tenaga dropped out in early October, saying it had other priorities. One of the actual bidders, US equity fund Blackstone, had to be asked re-enter the race ahead of the final offer stage. As a result, what was on the table fell short of Government expectations.

Since the Government announced its intention in February 2012 to sell Bord Gáis Energy, its price tag was estimated at somewhere between €1 billion and €1.4 billion, although some industry sources suggested that these figures were optimistic. It now appears that the final bids were short of €1 billion, which was originally fixed as the reserve price when the auction began earlier this year.

Harvesting rights
In 2012, shortly before the Government unveiled which of its businesses it intended selling, Minister for Communications, Energy and Natural Resources Pat Rabbitte dismissed talk of a fire sale, saying "there will be no State assets going up on eBay". This was after the first attempt to sell Irish Life had been abandoned for similar reasons to those given on Wednesday.

Bord Gáis Energy was one of the bigger elements of the disposal programme that Rabbitte's colleague, Minister for Public Expenditure and Reform Brendan Howlin announced in February 2012, and which the Government hoped would raise €3 billion. The others were the harvesting rights to Coillte's forests, the State's 25 per cent share in Aer Lingus – in the right circumstances – and some ESB power plants.

Of these, only the plan to sell ESB power plants looks like it is going to happen. The group – one of Bord Gáis's rivals – has sold its 50 per cent stake in a joint venture, Marchwood Power in Southampton in southern England, for about €160 million.

A similar stake in a Spanish partnership Bizkaia and two of its Irish peat-burning plants, Lough Ree and West Offaly Power, are also up for sale. The ESB has to raise €400 million from its disposals to pay the Government a special dividend next year and is reckoned to be about €200 million short of this.

The Government dropped the sale of Coillte’s harvesting rights earlier this year after a report found that it could make between €400 million and €774 million from such a deal, but ultimately end up incurring €1.3 billion in costs, including pension liabilities, over the longer term. The document also indicated that it could endanger 12,000 jobs in rural areas, mainly in the timber industry.

More recently, Minister for Transport, Tourism and Sport Leo Varadkar said that he does not favour selling the Aer Lingus stake at the moment, and in any case the Government is not pursuing it. While he stopped short of ruling it out, he argued that it was difficult to see the circumstances arising where the Government would sell it. They include a generous price and a "commitment to Ireland that they will honour in the long term".

The reason for pulling the Bord Gáis sale was more straightforward. On Wednesday morning, Rabbitte said the offers on the table were not acceptable. He pointed out that both he and Howlin, had always been clear that Bord Gáis Energy would only be sold for a price that fully recognised its inherent value.

That opens the question of what is acceptable. The seller did not believe that the offers on the table were acceptable, the potential buyers obviously did. Two of them, another of Bord Gáis's rivals, Viridian, and British player Centrica would already have had a good understanding of the business. The third, Blackstone, has a specialist energy team and knows the utility business well.

Some sources this week suggested that the Bord Gáis group itself had not adjusted its own valuations of the various assets that make up its retail business to reflect their true value and the debt associated with them. In short, that it did not “mark them to market”.

In terms of what was on the block, the business consists of between 800,000 and 900,000 gas and electricity customers. Wind farms with a total capacity to generate around 200 mega watts (MW) of electricity with close to a further 300 MW in various stages of development, and a gas-fired power plant with a capacity of more than 400 MW.

The bulk of the wind assets were originally part of SWS, which the group bought in 2009 in a deal valued at €500 million, including their debt. It pledged to invest a further €700 million building out the rest of the wind farms and developing the business, a €1.2 billion commitment.

It spent more than €400 million on the power plant. It never revealed its customer acquisition costs, but once it began competing with the ESB in the retail market, it backed this with an extensive media campaign. The energy division generated €19.8 million in profits before tax and interest last year, it lost €14 million in 2011. The group invested €97 million in the business in 2012 and €87 million the previous year.

Some of the assets came with debt attached. For example, a number of SWS subsidiaries, acquired when Bord Gáis took it over, had project finance in place. This was secured against those specific developments. At the end of last year, the liability involved was €180 million. The overall debt associated with the division was said to be €400 million.

Review of State asset
Valuing something such as Bord Gáis Energy is not as simple as adding X to Y and subtracting Z. This is why companies hire corporate advisers. And there were a lot of them involved in this deal. Bord Gáis's main adviser was Royal Bank of Canada, but it also took on Royal Bank of Scotland to counsel it on the reorganisation of the group's €2.2 billion of debt. New Era, which is itself supposed to be the Government's adviser, hired Barclay's as its adviser.

Irrespective of the outcome, they will still get their fees, but perhaps we should be asking whether they earned them in the first place. If they had not worked it out already, it must have become clear at a relatively early stage in the process that the market was unlikely to pay what the Government and company were seeking. That would have left them with the option of either lowering their sights or pulling the sale sooner.

There is also question mark over New Era’s role. The Government set it up partly in response to a report of a review of all State assets by economist Colm McCarthy, which amongst other things recommended the sale of those businesses singled out last year for disposal. Most people saw its remit as managing this process on the Coalition’s behalf.

The other actor in all of this was the troika. The original bailout deal included a provision that the previous government would review the State’s involvement in the energy sector with a view to selling some of its interests. The current administration agreed the original asset sale programme with the troika.

However, a spokesman for the European Commission’s economic and monetary affairs division said yesterday that “there is no specific condition under the programme in relation to privatisations, except for the general provision that half of the proceeds should be used for debt reduction”.

He went on to point out that Budget 2014 includes a €110 million for “stimulus measures”, to be financed from privatisation, but it is not specifically linked to Bord Gáis, and so there are no imminent implications from its delayed sale. “We are speaking about a relatively small amount included in the 2014 budget and there is still time to privatise State assets between now and the end of the year,” he concluded.

So presumably, the troika is not too concerned by the outcome of the Bord Gáis sale, or presumably the fact that most of the overall State asset disposal programme has been dropped for one reason or another. To be fair, Mr Rabbitte did say last year that the troika agreed that the Government should not be bounced into a fire sale.

On Wednesday, Alan McQuaid, chief economist at Merrion Capital, argued that the decision to walk away from the Bord Gáis Energy process is proof that there were never going to be any fire sales of State assets.

Another source, close to the bidding, echoes this, but has a different take on it. “When they announced it early last year the Government probably needed to sell Bord Gáis, but things have changed and price became much more critical.”