Italy’s stock market launch of Enel became the world’s largest initial public offering following the sale of euro18bn worth of shares. With a high launch price, investors will be expecting great things from the utility, which now faces regulatory and competitive pressures in the European market. Siàƒ¢n Green asks, can it deliver?
Enel, the newly floated Italian electricity utility, had a disappointing debut on the Milan stock exchange in spite of high demand for shares from domestic and institutional investors. The failure of the shares to rise significantly above their launch price of euro4.3 ($4.57) confirmed analysts’ views that the offer price set by the treasury was over-optimistic given the utility’s current performance.
The partial privatization of the state electricity generation and distribution utility was mooted for success soon after the launch of the initial public offering (IPO) at the end of October. Both the retail and institutional investor parts of the sale became quickly oversubscribed, forcing the Italian treasury to increase the size of the offer from 23 per cent to 34.5 per cent. The result was sales of euro18bn ($19.1bn), making it the world’s largest ever IPO.
The treasury fixed the offer price for the shares at euro4.3 per share, roughly equivalent to 33 times current earnings. This gave Enel a market capitalization of euro52.14bn, making it the largest publicly listed electric utility in the world. But on its first day of trading at the beginning of November, the share price hovered around euro4.3 per share, briefly rising to euro4.4 per share. As PEi went to press, shares closed down at euro4.28.
Receipts from the partial sale of its 100 per cent stake in Enel will help the Italian government to reduce public debt, a promise it made to its European partners on entering the European single currency. Around 40 per cent of the shares on offer was reserved for Italian retail investors, including Enel’s 80 000 employees, while the remainder went to national and international institutional investors. Some 3.8m Italians took part in the domestic retail offer.
The listing has increased the market capitalization of the Milan stock exchange by around ten per cent, and Enel also accounts for about 12 per cent of the Milan bourse’s list of blue chip stocks – MIB-30 – that is used as a benchmark index. This influence put pressure on global fund managers to participate in the offer, further increasing demand for the shares.
But in spite of this demand, analysts criticised the terms of the IPO. It was widely claimed that the offer price was too high when set against comparable European utilities and the utility’s performance.
Enel was formed in 1962 from the nationalization of 1250 private companies. It is Italy’s main generator and distributor of electricity, producing around 71 per cent of electricity generated.
It is now the second largest producer of electricity in Europe after France’s EDF with a customer base of around 29m , and is the world’s third largest electricity group. It is a holding group, controlling five major companies covering production, transportation, distribution, sales and nuclear energy.
Like a number of other European utilities, Enel is trying to diversify its operations into telecoms, water and other services. It has a 51 per cent stake in telephone company Wind and a 30 per cent holding in television company Telepiu.
Enel has also enjoyed a financial turnaround in recent years. Last year, the company’s earnings almost doubled to ITL4.3tr (euro2.2bn, $2.4bn), and first half 1999 net profit of ITL2.2tr was up 25 per cent on last year. The company’s debt, meanwhile, was down to ITL17.7tr as of June 30 from ITL33.2tr at the end of 1997. Part of this improved performance is down to a restructuring and cost-cutting exercise, including the reduction of the company’s workforce by 20 000 over the last three years.
But in spite of improved performance and diversification, the offer price was still seen as high by analysts. Like most European utilities, Enel’s earnings will come under regulatory pressure in the coming years. The country’s regulator has already set price caps on electricity tariffs in order to encourage efficiency.
The ten per cent cut in electricity tariffs, recently agreed by the electricity regulator, could see a fall in net profits from a projected level of euro2.2bn in 1999 to euro1.3bn in 2000. A rise in the level of competition in the Italian energy market under deregulation plans could also see the erosion of Enel’s customer base – an occurrence already seen by utilities in competitive markets such as Germany and the UK.
Enel is hoping to be able to offset these factors with a strategy that it hopes will see it become a major European multi-utility. By investing in water, telecoms and other utility sectors, it aims to bring in new revenue streams that will make up for the projected fall in profits in the power sector, and will also increase its capitalization value. This is a strategy that several utilities in Europe have already embarked on, including France’s Vivendi and more recently Germany’s RWE. Some remain skeptical as to how quickly Enel will be able to turn this plan into profitable growth.
Chairman Chicco Testa sees further potential for cost cutting that should enable Enel to become a leaner, more efficient organization. He has pledged to cut staff numbers by 31 per cent – 26 000 people – over the next four years.
In addition, Enel will generate revenues from the sale of generating plants next year. It will hive off around 27 per cent of its generating capacity – 15 000 MW – enabling foreign competitors to access a significant chunk of the Italian market. Southern Company of the USA has already expressed an interest in these plant as part of its strategy to acquire European generating companies.