It is back to square one for the Government, in its attempt to sell off Bord Gáis Energy (BGE) for a "fair value". The problem is nobody except the State and its advisers knows what this is, or how it is calculated.
At 9am yesterday morning, telephones rang simultaneously at Investec Corporate Finance, the advisory arm of Macquarie bank and at the corporate finance arm of Goodbody stockbrokers.
The three firms were representing, respectively, Blackstone, Viridian and Centrica, who each bid about €1 billion for Bord Gáis Energy on Monday. They were informed that after a near nine-month sale process costing millions of euro in fees, the sale was being pulled because the bids were too low.
At 9.06am, Minister for Energy and Natural Resources Pat Rabbitte released a similar statement to the media.
Surprisingly, there was no last-minute haggling to bridge the valuation gap. The bidders had understood that one of them would be selected to enter exclusive negotiations.
Rabbitte said the State’s advisers (NewEra and Barclays) and those of Bord Gáis (Royal Bank of Canada) concluded that the €1 billion bids for BGE were lowball. For the last two years, the Government has never challenged widespread reports that it felt BGE was worth up to €1.4 billion. Is it really worth that much?
Secret memorandum
Back in 2010, Davy sent in a secret memorandum to the Department of Finance recommending the wholesale restructuring of the State energy sector through combining ESB, Eirgrid and Bord Gáis into Irish Energy networks. It advised that BGE then be sold off, and suggested it was worth €1 billion.
The original September deadline for BGE bids produced just one, highly conditional bid – from Viridian – that breached €1 billion. In another note earlier this year, Davy again suggested BGE was worth closer to €1 billion than €1.4 billion.
The bidders who met this week’s deadline are hardly novices when it comes to valuing energy companies.
The Blackstone bid was compiled by its energy team in New York, led by senior executive Sean Klimczak, with assistance from Fisterra Energy, led by a former boss of Iberdrola Resources. Viridian and Centrica are both highly regarded trade players who know the market.
Rabbitte was at pains to emphasise that the process had been exhaustive with "significant international interest". Ireland, Europe's comeback story, is a la mode for international investors. But still the Government failed to raise its mysterious "fair price".
One possibility is that the State and its phalanx of advisers may simply have overvalued BGE, which last year produced earnings of only about €80 million. According to people close to the process, its renewables division requires investment of “hundreds of millions” of euro to build it out.
The question also remains as to why the advisers also did not recommend breaking BGE into four lumps – the retail business, the wind development assets, the functioning wind farms, and the Firmus business in Northern Ireland – to sell them separately to maximise value.
Limits of job lot
The profiles of the ideal buyers of each lump would be quite different. Selling them as a job lot meant that, whoever bought it, some of the lumps were being discounted due to unsuitability. It would also have been consistent with a legal order from Europe to separate Bord Gáis's networks from its generation businesses.
BGE came with at least €400 million of debt, suggesting an equity value, according to the bidders, of less than €600 million. The State’s deal with the troika meant half of this had to be used for debt paydown.
Perhaps selling off one of the State’s crown jewels to fund a jobs stimulus of no more than €300 million was politically too much too bear.
Or is this all just a public game of hardball?
