Elliott Advisors (UK) Limited (“Elliott”), which advises funds that
collectively are shareholders with a total economic interest equal to
2.9% of common stock of EDP - Energias de Portugal, S.A. (“EDP” or the
“Company”), today released a letter to the Company’s Boards as well as a
presentation outlining its strong belief in the significant value
creation opportunity at EDP.
Elliott has devoted considerable time and resources into better
understanding the challenges and opportunities facing EDP. As a result
of this extensive research, Elliott is of the firm view that EDP
possesses a collection of high quality yet undervalued assets, with
substantial unrealised potential. The greatest source of uncertainty
facing the Company today is the offer put forward by China Three Gorges
(Europe) S.A. (“CTG”) on 11th May 2018 to take control of
EDP. Elliott respects CTG and its important role as EDP’s largest
shareholder. However, Elliott does not consider CTG’s bid — in its
current form — to be in the best interest of EDP’s stakeholders and
believes the existence of CTG’s bid is hindering EDP’s performance. In
Elliott’s view, CTG’s bid, if consummated, will leave the Company
weaker, more volatile, and with a less attractive portfolio and
diminished growth opportunities.
Notwithstanding the current impasse, Elliott believes there is an
alternative, more promising pathway. This fresh approach would empower
EDP, transforming its existing portfolio into that of an “ideal
utility” focused on core areas of technological expertise, with lower
leverage and an increased capacity to invest in growth. A realistic
assessment of CTG’s bid, which currently shows barely any signs of
progress and faces considerable regulatory hurdles to completion,
coupled with an objective assessment of this superior stand-alone
pathway, can make way for a brighter future for EDP; a future that
commands a premium valuation, maximises potential and is in the best
interest of all stakeholders.
Consistent with its commitment to constructive engagement, Elliott has
sent a letter to the members of EDP’s General and Supervisory Board and
the Executive Board of Directors that concludes that an empowered EDP
– one that invests in growth and optimises its portfolio – can achieve
positive outcomes and deliver superior value for all stakeholders.
Elliott invites all stakeholders to consider this alternative, superior
pathway and to secure a brighter future for EDP.
Elliott has today launched a new website, www.Empower-EDP.com,
where both the letter and a detailed presentation are available to view
and download. Interested parties are encouraged to visit the website to
receive additional information and to sign up for future updates.
The full text of the letter is provided below.
Elliott Management Corporation manages two multi-strategy funds which
combined have approximately $34 billion of assets under management. Its
flagship fund, Elliott Associates, L.P., was founded in 1977, making it
one of the oldest funds of its kind under continuous management. The
Elliott funds’ investors include pension plans, sovereign wealth funds,
endowments, foundations, funds-of-funds, and employees of the firm.
Elliott Advisors (UK) Limited is an affiliate of Elliott Management
Luis Amado, Chairman of the General and Supervisory Board
de Portugal S.A.
Avenida 24 de Julho
Cc: Members of the General and Supervisory Board; Members of the
Executive Board of Directors
14 February 2019
Dear Mr. Amado,
We are writing to you on behalf of funds (together, “Elliott” or “we”)
that collectively are shareholders with a total economic interest equal
to 2.9% of the common stock of EDP - Energias De Portugal, S.A. (“EDP”
or “the Company”), making us one of your top ten investors and
demonstrating our strong belief in the value opportunity at EDP.
Over the course of several months we have devoted considerable time and
resources to better understanding the challenges and opportunities
facing EDP. Our extensive research convinced us that EDP is an
attractive company with substantial unrealised potential. We write today
to communicate our firmly held views that (1) the status quo is
suboptimal, and (2) immediate actions can be taken to empower EDP and
create value for all stakeholders.
We have engaged in dialogue with a diverse set of EDP stakeholders. The
prevailing view communicated to us, and one with which we agree, is that
the greatest source of uncertainty facing the Company today is the Offer1
put forward by China Three Gorges Europe S.A. (“CTG”). We fully respect
CTG’s position as EDP’s largest shareholder. In any scenario going
forward, CTG will have an important role to play in charting EDP’s
future. However, it is clear to us and many of our fellow shareholders
that CTG’s Bid in its current form is not in the best interests of EDP
stakeholders and would ultimately leave EDP weaker: more volatile, and
comprised of a less attractive asset mix, and with fewer growth
opportunities. The stalled Bid has had the practical effect of hindering
EDP’s progress, resulting in share price underperformance relative to
We believe that the current impasse can be overcome. To this end, we
hope that our suggestions – shared with the widest set of market
participants – can generate the necessary momentum for EDP to chart a
new pathway forward, and we thank you in advance for your consideration
We have organised today’s letter as follows:
I. EDP Today: A Unique Value Opportunity
II. CTG’s Bid: Hindering
III. A Promising Alternative Pathway: Invest and
IV. Next Steps
I. EDP Today: A Unique Value Opportunity
EDP possesses a collection of high quality yet undervalued assets. The
Company generates, distributes and supplies electricity powered by wind,
solar, hydro, gas and other sources of energy across the globe. EDP can
boast one of the world’s largest renewables portfolios, offering an
exciting degree of growth potential for years to come. At the same time,
regulated and long-term contracted activity generates the vast majority
of EDP’s EBITDA, providing a healthy level of stability. This mix of
stability and growth potential makes the Company an attractive
While EDP’s portfolio contains areas of great promise, taken together as
one company, it lacks focus. The four main business units already
operate as standalone entities with limited synergies. It is difficult
for investors to value the portfolio fairly, as EDP’s high-multiple
businesses are diluted by lower-multiple divisions, resulting in a
EDP is also weighed down by excessive leverage. At 4.0x net debt/EBITDA2,
EDP carries one of the highest leverage levels in the industry with
associated high levels of interest costs. As a result of these capital
constraints, EDP’s ability to pursue growth opportunities has been
considerably restricted, depriving the Company and its shareholders from
accelerating investment in high return opportunities available in EDP’s
We believe these challenges need to be addressed so that EDP’s market
valuation can fully reflect the intrinsic value of EDP’s attractive
asset portfolio. Today, EDP trades at a discount to all relevant
benchmarks, including (1) average price target expected by research
analysts, (2) average P/E multiples of both Iberian3 and
broader European4 peers, as well as (3) the valuation range
presented in EDP’s Executive Management report in June 2018. This is
We believe that these challenges are surmountable. With a new plan,
communicated effectively to shareholders and stakeholders alike, EDP can
transform its existing portfolio into that of an “ideal utility”,
focused on core areas, with lower leverage, and an increased capacity to
invest in growth.
II. CTG’s Bid: Hindering EDP’s Growth
The price of CTG’s current bid is too low and significantly undervalues
CTG has been a shareholder of EDP for a number of years. It currently
owns a 23% stake in the Company and has five representatives on EDP’s
General and Supervisory Board. CTG made a preliminary announcement for
the launch of a tender offer for EDP on 11 May 2018 at a low price of
€3.26 per share which significantly undervalues EDP’s growth potential.
The Bid was met with immediate scepticism. The most obvious problem with
the Bid is the unacceptable 4.8% premium5. As detailed by the
EDP Executive Board in June 2018, typical premiums range from 27% to
40%. In contrast to the €3.26 per share Offer from CTG, a typical public
market premium would result in a fair value ranging from €3.95 to €4.35
per share6. Moreover, based upon a valuation of the
individual business units of EDP as separate entities, the Company’s
fair value would result in a share price of €4.41 per share7.
Based upon precedent transaction multiples8, a fairer value
would attract a bid closer to €4.66 per share.
Click the following link to view figure 1: EDP trades at a discount
to intrinsic value; CTG's bid takes advantage of this value gap:
We agree with the conclusion of EDP’s Executive Board in its detailed
assessment: “The price offered does not adequately reflect the value of
EDP and the implied offer premium is low considering what is customary
for European utilities where the offerors have acquired control.”
Absent any increase in CTG’s Offer, there is essentially no prospect for
shareholder support for a Bid that fails to properly value their
CTG’s takeover Bid in its current form not only undervalues EDP, but
would also force an unattractive break-up and the loss of EDP’s most
valuable assets, given the myriad of regulatory approvals required.
Beyond a fair and reasonable valuation of EDP, a successful transaction
also requires clearing a number of regulatory hurdles. In its current
form, fifteen different anti-trust, foreign investment, energy, and
other regulatory bodies must actively approve the takeover. An
additional condition precedent is an amendment to EDP’s bylaws to lift
an existing voting interest cap, and CTG would have to clarify how they
plan to manage unbundling restrictions. EDP’s Executive Board posed a
number of questions to CTG last year, seeking clarity on the many
impediments, as well as justification for a Bid that significantly
undervalues the Company. To our knowledge the Company still awaits
answers to those questions.
To date, sixteen of the seventeen major conditions precedent to clear
the deal remain unresolved, with only one anti-trust approval received
after nine months. The Bid is already one of the longest M&A processes
the utilities sector has ever seen and has clearly stalled. Based upon
utilities deals notified to the European Commission (“EC”) in the past
five years9, the average deal takes 68 days between
announcement and EC filing. Between announcement and closing, the
average deal takes 162 days. With nearly every regulatory issue still
unresolved, more than 278 days have elapsed since CTG announced its
EDP’s business includes one of the most attractive U.S. renewable energy
platforms and North America represents 17% of EDP’s EBITDA10.
As such, for the Bid to succeed in its current form the approval of the
Committee on Foreign Investment in the United States (“CFIUS”) would be
As Reuters reported in June 201811, “EDP’s crown
jewels are the renewable assets in the U.S., which are owned in the
portfolio of EDPR. CTG knows that they would not get approval from CFIUS
to keep them should they own a majority stake in EDP.”
While no clear steps have been taken to resolve these outstanding
issues, one typical approach to avoiding regulatory roadblocks would be
for CTG to divest key parts of the portfolio. Specifically, to work
around CFIUS, EDP would likely need to divest its U.S. renewables
portfolio. Similar regulatory challenges related to unbundling would
likely require divestments of all of EDP’s Portuguese generation
Any decision around changing the portfolio should be driven by what
would maximise value to EDP’s shareholders and stakeholders. In our
view, if CTG’s Bid were to proceed, major divestments would be made as a
reactive response to regulators’ demands in an attempt to navigate the
transaction’s regulatory maze, rather than as the result of a proactive,
thoughtful, Company-led plan designed to maximise shareholder value.
Such U.S. and Iberian divestments would leave EDP weaker.
Click the following link to view figure 2: CTG's bid would force an
unattractive break-up and the loss of EDP’s most valuable assets: https://www.empower-edp.com/en/figure2
In short, it is clear to us that CTG’s bid is not in the best interest
of EDP’s stakeholders. The price is too low, the process is stalled, and
the likely changes required by CTG’s bid would be driven by regulatory
conditions, rather than the best interests of all stakeholders. At this
point, the continued existence of a bid that is assumed impossible to
conclude successfully in its current form is hindering EDP’s growth. We
believe that EDP must move beyond this bid quickly, and that the process
of charting a new course is long overdue.
III. A Promising Alternative Pathway: Invest and Optimise
The status quo prolongs a sustained value gap. CTG’s Bid reinforces that
value gap, leaving EDP weaker, more volatile, with a less attractive
asset mix and fewer growth opportunities. We believe EDP must chart an
An empowered EDP should prioritise two key pillars for sustainable
growth: optimise the portfolio to re-focus on EDP’s core and reduce
excessive leverage; and invest in growth in core renewables
opportunities at attractive rates of return.
This new EDP would be more focused, committed to growth and less
levered. EDP could offer an industry‐leading asset mix, attractive
financial metrics, and a clear and compelling growth story – all of
which would likely drive re‐rating and deliver significant upside for
Indiscriminate divestments, as CTG’s Bid would likely require, could put
jobs at risk. So too would clinging to an underperforming status quo. An
approach that prioritises investment and growth offers the most
encouraging prospects for EDP’s workforce.
1. EDP should rebalance its capital allocation and invest in growth in
its core businesses
Invest in Renewables
Historic shareholder returns demonstrate that investment in renewables
has been very profitable for EDP, with 92% total shareholder returns
over the last five years for EDP Renovaveis compared with 50% total
shareholder returns for EDP as a whole12. Furthermore, with
the renewables market expected to grow between 11% - 15% p.a. in
2019/2013, EDP needs to be focusing its attention and
investment on this core area.
Historically a lack of sufficient capital has constrained Company’s
ability to fully leverage opportunities in its renewables portfolio.
In 2009, EDP set the target of reaching 10.5GW in renewable capacity
by 2012, but only reached that target in 2017.
With increased financial flexibility and focused resource dedication,
EDP should be able to substantially increase renewable capacity to
cement its market position. Elliott’s view is that the Company should
be adding c. 2 GW of capacity on an annual basis. This target is
achievable, for example by tapping into
c. 3 GW of existing
pipeline in North America that is currently in the pre-development
Reduce debt and lower the cost of debt
Deleveraging will result in more favourable ratings metrics. As noted
by Moody’s Credit Opinion, “The rating could be upgraded in the event
that improving conditions were to be reflected in more rapid and
extensive deleveraging than currently contemplated, such as would be
reflected in RCF/net debt in the mid-teens and FFO/net debt of around
20% on a sustainable basis”14. Elliott believes New EDP
will be within the upgrade threshold.
Deleveraging and potentially a rating upgrade will in turn enable the
Company to lower its interest expense burden. EDP’s cost of debt would
also benefit from the sale of EDP Brasil, which currently incurs
average cost of debt of 11.1% vs. 4.1% for EDP as a whole.
Reinvest in EDP
The influx of capital that would result from prudent divestments would
provide the opportunity to not only strengthen investments in core
areas of growth, but also to consider other means of value-maximising
Another option for consideration is a share buyback programme in which
EDP reinvests in itself, especially in light of today’s valuation gap,
our confidence in the Company’s future growth prospects as well as
Executive Board confidence that EDP’s value is in excess of CTG’s bid
2. EDP must optimise its portfolio to reduce excessive debt and re-focus
on core businesses
Sell EDP Brasil stake
Today, EDP Brasil lags behind competitors in terms of capital
expenditure and ranks 7th in private energy generation and 9th
in distribution15. Given the growth potential of the
Brazilian market, Elliott believes EDP Brasil is an attractive
business which would benefit from a new committed owner willing to
make the necessary capital investment. EDP’s stake in EDP Brasil could
be sold at a significant premium to current trading value in line with
recent Brazilian utility transactions given the considerable demand
for this type of platform.
In addition, the ownership of EDP Brasil exposes EDP to the volatility
of the Brazilian Real as well as a higher weighted average cost of
capital, which is reflected in the Company’s lower trading multiple.
Releasing trapped value in EDP Brasil would allow EDP to crystallise
significant capital gains, making further capital available for
attractive investment opportunities elsewhere.
Sell a 49% Stake in EDP’s Iberian Electricity Distribution
EDP should take advantage of significant demand from infrastructure
investors who value network assets at a substantial premium to public
markets and sell a 49% stake in its Iberian electricity distribution.
Iberian Networks is a regulated asset with long-duration cash flows
and one of a limited number of remaining opportunities for financial
investors to deploy capital in this space. Given the recent upgrade of
Portugal’s rating, EDP’s Iberian Networks business will be attractive
to a large number of buyers.
Brokers value the Iberian Networks at between 7-10x LTM EBITDA16.
Elliott believes that selling a minority stake in the business can
crystallise a materially higher valuation from yield-seeking
When Naturgy recently sold a 20% stake sale in Spanish gas
distribution to CPPIB and Allianz, the company realised an additional
40% (or €4bn) value uplift17 compared with the public
market valuation at the time. We are confident EDP is well positioned
to take advantage of a similar value-creation opportunity.
Sell legacy Iberian thermal assets
EDP should focus on investing in its core franchise, namely the
Company’s position as a worldwide renewables market leader, and one of
the greenest power generators in Europe. EDP should therefore sell
Iberian thermal assets to concentrate on a more focused and cohesive
asset mix, while also raising significant capital to invest in higher
return renewables projects.
A sale of EDP’s portfolio of Iberian thermal power generation is
consistent with EDP management’s strategy, and can be achieved at an
attractive value of at least €1.7bn based on precedent comparable
The sale of these legacy assets would also mean the Company could
close the valuation gap between the current market-implied value of
the thermal portfolio and its M&A value, while still remaining the
leading power producer in Portugal.
IV. Next Steps
EDP faces three different pathways forward: the status quo, CTG’s Bid,
or as “New EDP” – the Invest and Optimise Plan.
Click the following link to view figure 3: EDP's contrasting futures:
In Elliott’s view, the optimal pathway forward is clear. An empowered
EDP – one that invests in growth and optimises its portfolio – can
achieve positive outcomes for all stakeholders. The key steps ahead
would involve the following:
1. Realistically assess CTG’s bid
CTG’s current Offer shows no signs of progress and lacks any chance of
success in the absence of the following:
Strong commitment to resolve regulatory and anti-trust issues (e.g.
Clarity on CTG’s intentions with regards to resolving the unbundling
Satisfactory detail on the strategic plan for EDP and assets CTG
intends to contribute; and
A revised offer price reflecting EDP’s fair value.
2. Invite all stakeholders to take a fresh approach
After grappling honestly with CTG’s bid, EDP has a unique window of
opportunity to think anew about future pathways. Decisive actions will
be needed to move beyond the current impasse, including the formal
withdrawal of the existing bid. All stakeholders stand to benefit from
fresh exploration of how aligned interests can be addressed. With
constructive deliberation, EDP can break the current impasse and move
beyond the status quo.
3. Implement the Invest and Optimise Plan
EDP should put forward an ambitious plan to invest and optimise its
portfolio, which would ideally include:
Investment in EDP’s current pipeline and key areas of growth (e.g.
Portfolio optimisation through realising the full value of selected
Balance sheet optimisation with reduced levels of debt and enhanced
We believe that these steps can be achieved in a constructive,
collaborative manner. This pathway forward allows for a brighter
future in which EDP can become an ‘ideal utility’ that commands a
premium valuation, maximises its potential and is in the best interests
of shareholders and stakeholders.
We look forward to engaging with you and all stakeholders to take
advantage of EDP’s unique opportunities ahead.
Elliott Advisors (UK) Limited
Preliminary Announcement for the Launch of a General and Voluntary
Tender Offer for the Acquisition of Shares representing the Share
Capital of EDP – Energias de Portugal, S.A. (11 May 2018) (the
Net debt as per EDP’s 9M 2018 reporting; Bloomberg consensus 2019E
Iberian peers include: Endesa, Iberdrola, Naturgy.
European peers include: Engie, Endesa, Iberdrola, Enel, Naturgy,
E.ON, Innogy (pre-transaction) and Orsted.
Premium over share price at close of 11 May 2018, the day of the
announcement (made after market closed).
Based on 27% to 40% premium to closing EDP share price of €3.11 per
share at 11 May 2018.
Precedent transaction based on sum of the parts valuation derived
from Report of the Executive Board of Directors EDP – Energias de
Portugal, S.A. (8 June 2018) and EV to equity bridge as per EDP 9M
Precedent EU transaction multiples based on Report of the Executive
Board of Directors EDP – Energias de Portugal, S.A. (8 June 2018)
and EV to equity bridge as of EDP 9M 2018 financials.
Based on utilities deals notified to the EC in the last 5 years,
including those with the following NACE codes: (i) D.35.1 – Electric
power generation, transmission and distribution; (ii) D.35.2 –
Manufacture of gas, distribution of gaseous fuels through mains;
(iii) E.36 – Water collection, treatment and supply; and (iv) E.37 –
Consolidated LTM EBITDA (excluding Other & Adjustments) as of 9M
“China Three Gorges sounds out interest in EDP’s U.S. assets:
sources”, Reuters (26 June 2018).
Bloomberg as of 8 February 2019.
Bloomberg New Energy Finance. Based on EMEA and Americas onshore &
offshore wind and utility PV.
Moody’s Credit Opinion (7 August 2018).
Ranking excludes state-owned companies and Eletrobras.
EV/EBITDA LTM EBITDA multiples from: Goldman Sachs (8 Jan 2019), RBC
(26 Nov 2018), Macquarie (19 Oct 2018), JP Morgan (14 May 2018), UBS
(15 Aug 2018), Credit Suisse (28 Jan 2019), HSBC (15 May 2018),
Morgan Stanley (2 Mar 2018).
Gas Natural Fenosa 9M 2017 results presentation.
Based on average precedent transactions EV / EBITDA multiple of 8.5x
and assumed €0.2bn LTM EBITDA for EDP’s thermal power generation.
View source version on businesswire.com: https://www.businesswire.com/news/home/20190213005945/en/