4 Feb 2002 – Swedish power group Vattenfall were buoyed by yesterday’s news that the European Commission had approved its $1.63bn acquisition of the outstanding 44.8 per cent of Berlin power utility Bewag from Mirant. Today, rating agency Standard & Poor’s removed all long term negative ratings from Vattenfall and reaffirmed its long-term single A minus rating.
In December 2001 Mirant agreed to sell its position in Bewag to the Swedish state-owned group. The parties are now free to close the transaction, which they expect to achieve in the week of February 11.
Vattenfall already owns a 44.8 per cent interest in Bewag through its subsidiary HEW. It is currently merging its German operations to build the new entity “Vattenfall Europe”, which will operate on the German power market and Bewag is a key component of this new company.
Mirant said the sale would net $900m after repaying debt to finance the investment in Bewag. Marce Fuller, president and chief executive officer, Mirant said the proceeds would assist in their efforts to strengthen the balance sheet and improve liquidity in order to retain their position as one of the major players in the competitive energy sector.
The reappraisal of Vattenfall by Standard & Poor’s (S & P) takes into account the positive implications of the Bewag acquisition and a view by the rating agency that the price outlook in both Sweden and Germany is stable. S & P analyst Andreas Zsiga said, “Vattenfall has a much firmer grip on its German activities and is now six months into the integration”. He welcomed the fact that the company had scaled back on non-core activities and said the financial profile of Vattenfall was stable despite the financing requirements of the Bewag deal.
Vattenfall Europe (formerly known as Neue Kraft) also includes Hamburg-based HEW, electricity generator Veag, and its coal supplier Laubag. The acquisition of Mirant’s stake enhances Vattenfall’s control over its German operations, including, importantly, its cash flow and liquidity, and allows Vattenfall to accelerate the integration process. The company targets annual cost savings of up to Swedish Krona 4.5bn ($423.7m) in the medium term.
The Bewag acquisition and the possible Skr8.0bn buy-out of HEW’s 25 per cent minority owner, the City of Hamburg, is expected to further increase Vattenfall’s gross debt. This was assessed at about Skr89.0bn at year-end 2001, excluding about Skr12.7bn in pension liabilities. Vattenfall will, however, benefit from Bewag’s cash flows, and a significant proportion of the German acquisition is expected to be financed by financial assets.
S & P said its ratings on Vattenfall were based on the group’s strong position as the largest Scandinavian and third-largest German electricity utility; access to a competitive and generally modern generation portfolio; major downstream supply businesses; significant electricity distribution and heating monopoly operations; and increased geographical diversity.
Zsiga acknowledged that there were negative factors including a relatively weak financial profile following aggressive growth in recent years and that price movements or delays in integrating Vattenfall Europe could affect the ratings.
Not all analysts are convinced by S & P’s reasoning. In a conference call, Mike Ridley from Schroder Salomon Smith Barney said that they were “weak arguments”.
S & P accepted that there were risks and that the potential for a downgrade existed. He confirmed his understanding that Vattenfall would make no further material acquisitions other than those already agreed. S & P said that the company’s management was committed to consolidating the current position until 2004, and to focus on its core electricity and heating businesses.