Acquisition Overview
U.S. private equity firm KKR has agreed to buy London-based power generation firm CounterGlobal in an all-cash deal at £1.75bn ($2.18bn). With a global portfolio of over 138 thermal and renewable power plants in 20 countries, the company is deemed to have a significant potential for both organic and inorganic value-accretive future growth. As such, the combination of ContourGlobal’s steady and predictable cash flow streams coupled with the growing impact of the global energy transition and the rising energy prices provide for a perfect target for KKR’s infrastructure portfolio. This deal is part of a recent focus for giant private equity firms like KKR on London-based companies, considering them as undervalued and hence an attractive investment.
Deal Structure
KKR will invest in the acquisition through a company called Bidco, owned by KKR Global Infrastructure Investors IV, a US $17 billion fund focused on critical infrastructure investments. Bidco will pay 259.6 pence per share in cash as well as 4 pence per share as a dividend to shareholders for Q1. This comprises an attractive premium of 36% to the closing price of 193.4 pence per share on 16-th May (the last day before the acquisition announcement). In terms of deal value, the entire share capital of ContourGlobal is estimated at £1.75bn ($2.18bn) on a fully diluted basis and an enterprise value of approximately $6.19 bn. The consideration payable by Bidco will be funded by a combination of equity and debt financing. Specifically, the equity is to be drawn from funds advised by KKR. The debt financing is to be provided pursuant to an interim facilities agreement between Bidco and BNP Paribas.
The firms acting as financial advisors for the two sides are JPMorgan Chase & Co. (Bidco), Goldman Sachs Group (ContourGlobal) and Evercore Inc. (ContourGlobal).
ContourGlobal Overview
A London-listed company founded by the US entrepreneur Joseph Brandt and Reservoir Capital, ContourGlobal has successfully grown into a global platform of contracted power generation with strong expertise across wind, solar, hydro and thermal generation. The business is organized into two operating divisions-Thermal and Renewable- with a combined capacity of 6.3 GW across 4 continents including Europe, North America, Latin America, and Africa. With respect to its business model, ContourGlobal focuses on long term and wholesale contracted or regulated power generation utilizing different technologies, in different parts of the world and at various stages of development. Looking at its past performance, the company has an outstanding track record of pursuing value maximizing growth and integrating new assets, which has resulted in approx. 25% CAGR in terms of installed capacity since 2006.
Founded: 2005
Number of employees: 1,489
EV: $5.58 bn
LTM Revenue: $2.15bn
LTM EBITDA: $774.2m
Market Cap: $1.98bn
KKR and Bidco Overview
Bidco is a newly formed company indirectly owned by funds advised by KKR. KKR is a leading global investment firm with approximately $479 billion in assets under management and a 46-year history of leadership, innovation and investment expertise. Since establishing its Global Infrastructure strategy in 2008, it has been one of the most active infrastructure investors around the world with a team of approximately 75 dedicated investment professionals. With over 65 infrastructure investments spanning the globe across multiple sectors such as renewables, utilities, midstream, transportation and water, KKR is a key player in the industry with a wealth of experience and a long track record of operational value creation.
Founded: 1976
Number of employees: 1,900
LTM Revenue: $20.21bn
LTM EBITDA: $5.13bn
Market Cap: $40.15bn
Industry Insight
The energy industry is currently undergoing a period of enormous disruption and change. A surge of demand after Covid-19 lockdown measures were lifted was followed by Russia’s invasion of Ukraine and this created the perfect disaster, sending oil and natural gas prices to record highs. As if that’s not enough, in recent years we have observed more and more countries making public declarations of carbon emission reductions, with President Joe Biden taking the U.S. back into the Paris Agreement by setting a goal for the country to reach net zero by 2050. Similarly, the EU in its Green Economy Plan has agreed to reach net zero emissions by 2050 with an intermediate reduction of 55% from 1990 levels by 2030.
These are serious issues that will need to be addressed by governments and companies together, but another key characteristic of the industry has to be kept in mind. Energy is a vital underpinning of the world economy and everything from prices to people’s well-being depends on having a cheap and reliable source of energy and electricity. Power demand is expected to double from 2020 to 2050, driven by long-term growth in population and GDP. Over the same period the share of electricity is expected to grow by a third to 30%, as a result of consumer trends and new technologies, such as electric cars.
Another challenge in front of power generation companies is how to deal with the intermittency of renewable energy sources. Although strong policy support might continue to channel huge investment into carbon-efficient power plants, it remains vital to ensure a reliable supply of electricity and a smooth energy transition. A possible solution to this problem is the use of batteries in hybrid plants, which combine different renewable energy sources and storage to produce an optimal mix of low- and no-carbon electricity.
To conclude, the difficulty of balancing energy supply and demand while cutting CO2 emissions will be an ongoing concern for the next century, which means that a huge amount of capital, technological innovation and geopolitical steps will be needed to tackle these global challenges seriously.
Strategic rationale
In terms of the acquisition rationale, 3 key imperatives can be identified to contribute to the transaction.
First, the deal presents an opportunity for shareholders to realise value for their holdings in cash in the near term by accepting the offer of a 36% premium to the share price prior to the acquisition announcement. Achieving a record financial performance of 50% revenue growth and 15% Adjusted EBITDA growth in the year 2021, the company has once again proved its operational expertise. Since the IPO ContourGlobal has returned more than 50 pence per share (acquisition price is 259.6 pence per share) to the company’s shareholders through dividends and its share buy-back programme.
However, despite ContourGlobal’s strong growth track record and shareholder returns, the company’s shares are still trading at a discount of the IPO price. One of the explanations for this underperformance can be the large shareholding of Reservoir Capital which limits the trading liquidity of the stock. Whatever the underlying reason is, both the management and the strategic buyers believe that the company is significantly undervalued. On the grounds of this belief, the proposed acquisition can be seen as beneficial for both sides, allowing shareholders to get a good return on their investment and KKR’s team taking advantage of the low price of a company in which they see a lot of value.
Second, the company can benefit greatly from KKR’s ownership in a private environment. One of the reasons being that KKR’s expertise and access to larger
and more flexible capital resources can support further the expansion of ContourGlobal’s power generation portfolio. The highly disruptive and time-consuming asset sales and development process requires a focus on long-term growth, in which KKR’s experience, global network and long-term partnership will serve as a huge support to the management team. Moreover, KKR’s infrastructure division is committed to
investing in a sustainable energy transition and it believes it can support ContourGlobal in its ESG-positive strategy, aiming to be net zero by 2050.
Lastly, the usual benefits of a company going private should also be taken into
account in the case of ContourGlobal. The new company will not have to comply
with some costly and time-consuming regulatory, administrative and financial
requirements, thus removing a large burden from the shoulders of the company.
There are three key aspects that feed into this idea. First, instead of focusing on adherence to government regulations, management can devote themselves
entirely to running and expanding the business. Second, with fewer requirements,
the private company will have the freedom to use more resources to continue its
investment in the renewables sector, keeping up with decarbonisation targets.
Finally, by removing the need to meet quarterly earnings expectations, the
management team will have the opportunity to position the company for long-term
growth thus developing the full potential of the company and benefiting both the
employees and the investors.
Long-Term Prospects
ContourGlobal has a proven track-record of acquiring and developing wholesale power plants with long-term contracts which bring steady and predictable cash flows; all factors that make it a very compelling business for a private equity firm. The expected surge in demand in the next 30 years due to population and GDP growth on the one hand, and the rising concern about climate change and the shift towards renewable energy on the other will lead to many disruptions in the energy industry. With ContourGlobal’s strong management team and KKR’s capital and experience in the infrastructure sector, the company could position itself very well for the future. Finally, following its goal of achieving net zero until 2050, ContourGlobal will require a lot of capital, support through uncertain periods and flexibility to operate in this fast-changing environment, hence making the acquisition by KKR a good strategic choice.
Written by Georgi Nedyalkov (St. John’s College, University of Oxford).
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