Expected 2018E AEPS accretion of $0.15-$0.25/share, which is in line with our expectations (please see the first Table 1 below)
SRE intends to own 100% of Energy Future Holdings (If realized SRE would own approximately 80% of Oncor and TTI would own the balance of 20%) after $3.0B debt at the holding company is paid-off, which we expect to occur within 7 years
Equity issue of some 50%-65% of SRE’s equity commitment, which is about $3.87B (60% of $6.45B)
Balance of the equity commitment is going to come from a combination of cash and debt, likely more debt in our opinion, given the plethora of projects that SRE needs to fund
Still searching for 40% equity commitment for transaction or about $2.58B of third-party equity investment: Looking for long-term strategic partner with about a 7 year investment horizon
Based on $7.5B five-year investment program at Oncor, SRE expects CAGR in net income to be some 6%-7% through 2022
SRE states 100% valuation for Oncor based on $18.8B EV
Deal expected to close in 1H2018
Conclusion: The more we study and hear about this deal, the more we like it.
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Conference call reveals little additional information other than multiple paid and that SRE would issue some equity to fund the transaction: It was revealed by management that it estimates having valued Oncor at some 9.9x 2018E AEBITDA and some 23x 2018E adjusted net income. This includes SRE’s estimate of the impact of Oncor’s recently settled 2017 rate case. The financial data is expected to be updated just before or after closing the transaction in 1H18.
· Oncor’s 2018E AEBITDA and Net Income based on offering price for EFHC: Based on the multiple that SRE believes it would pay, if successful, Oncor’s implied 2018E AEBITDA and Net Income would be about $1,900MM and $513MM, respectively
· The deal looks to be accretive based on 2018E. The following is based on 0% equity financing, 50%/50% equity/debt financing, and 100% equity financing scenarios assuming a uniform 5.25% interest rate on the debt financing regardless of financed amounts, and $3,870MM in SRE’s financing obligations. We assume new equity would be issued at $117/share and use 35% tax rate:
Under all scenarios, assuming our estimate of SRE’s 2018 numbers and SRE’s estimates of Oncor’s 2018E numbers are reasonably accurate, the deal looks to be accretive: We believe our estimate of the interest rate is on the high side based on recently closed financing deals in the utility sector.
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Strategically, we believe this is a good deal for SRE’s investors: The five year $7.5B investment program at Oncor should be accretive to SRE’s earnings and help raise the value of SRE. More than anything else, we believe that SRE paid just the right amount to win the bid, but not be strapped with the infamous “Winner’s Curse,” in our opinion. However, SRE’s choice to finance part of the deal with debt may be something that needs some explanation, in our opinion, based on some basic math.
Deal terms: Although details were scant, it seems SRE would buy 100% of Oncor’s ultimate parent, Energy Future Holdings Corp. (EFHC), for $9.45B in cash, resulting in an EV for Oncor of about $18.8B.
Third-party investor(s) for risk mitigation:
Based on some simple calculations, we believe that SRE paid just about the right amount for the deal:
SRE’s ultimate ownership: Sale to a 3rd-party investor(s) would leave SRE with total equity interest in EFHC of some 60% and, therefore, a 48% non-controlling interest in Oncor (EFHC currently indirectly owns an 80.03% equity interest in Oncor).
Depending on the tax rate at EFHC, debt financing may or may not be accretive to ROE:
Oncor’s CAGR in net income from 2016-to-2018 must be above 7.06% for SRE’s 2018 AEPS to be breakeven or higher:
Conclusion: We always believed that this transaction could be good for SRE, but circumstances had not prevailed on management to allow for SRE to submit a winning bid. However, given the price and the way it was structured, we believe that this transaction is good for SRE’s shareholder value, and strongly support management’s decision to make the acquisition.
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