IG Focus logo

December 2021

01. With the acquisition in Greece, Italgas willI become the European DSO leader
Data di pubblicazione:

New horizons for Italgas business: on 9 September 2021, Italgas achieved exclusive rights, as “preferred bidder”, in the tender called by the Greek government’s privatization agency, HRADF, to acquire 100% of DEPA Infrastructure S.A., a company that controls the three main local gas distribution Comapanies, with the coverage of almost the entire country. At the conclusion of the bidding process, on 10 December 2021 the relevant Sale and Purchase Agreement was signed.
What opportunities open up for Italgas? What investments can be made? At what returns? And what are the estimated impacts on Group’s earnings and dividends? The answers to these questions indicate that the deal has a very strong rationale, given the high impact expected on the EU energy transition path, the economic and environmental benefits forecasted in the energy consumption of Greek households and, last but not least, given the improvement in earnings and dividend growth expected for Italgas shareholders.

DEPA Infrastructure S.A. is currently 65% owned by Hellenic Republic Asset Development Fund S.A (HRADF), the fund created to manage the privatizations in Greece, and 35% by Hellenic Petroleum S.A. (HELPE), one of the country’s most important energy companies.

In the tender launched by the two current shareholders for the sale of DEPA Infrastructure, at the beginning of September Italgas has been selected as the “preferred bidder”, following a bidding process that involved a number of qualified competitors interested in the transaction: four different private equity funds (EP Investment Advisors, First State Investments, Macquarie and KKR), as well as the consortium between the SINO-CEE Fund and the Shanghai Dazhong Public Utilities Group.

DEPA Infrastructure is the company controlling the three main gas distribution operators in Greece: EDA Tess, EDA Attikis and DEDA, respectively active in Thessaloniki Thessaly regions, Attiki region and other territories. Together, these three operators cover almost the entire Greek market, having exclusive rights in their respective areas.

Italgas’ decision to participate in the DEPA Infrastructure tender is based on solid reasons.
First of all, because the acquisition has a perfect fit with Italgas’ regulated core business profile and its long-term strategic vision.
The deal is also attractive in absolute terms, considering the significant expected Return on Investment (ROI).
By seizing the opportunity to serve the entire Greek market and expanding its presence in an already known region, Italgas Group would also enjoy significant benefits in terms of geographical and regulatory diversification.
Lastly, the acquisition of DEPA Infrastructure would position Italgas as the leading gas distribution operator in the European market.

The natural gas demand is expected to grow sharply in Greece in the medium-to-long term, with natural gas continuing to win market share in the energy mix while replacing high pollutant sources, such as lignite or fuel oil. More specifically, gas demand from distribution networks is forecasted to increase at a 3.9% CAGR in the 2021-2030 period1, while household gas consumption should increase at a 5% CAGR over the 2020-2030 period2.

Increased penetration of distribution networks, cheaper natural gas prices compared to alternative fuels, and government incentives are expected to drive such demand growth.

Given these premises, Greece can not only achieve but also exceed the EU decarbonization targets.

Considering the current limited development of gas distribution in Greece, DEPA Infrastructure has visible chances to increase both the level of coverage and the penetration rate in the area. Italgas estimates that the number of users, from 509,000 in 2020, could exceed 1,050,000 in 2030, with a CAGR of 9% over the 2020-2026 period, against a significant extension of the length of the network, which would reach 11,500 km in 2030, from 6,875 km in 2020.

According to the initial estimates, this would result in approximately €1.1 billion of cumulative Capex over the 2022-2030 period and a significant increase in RAB of around 9% per year to 2026.

DEPA Infrastructure’s strong growth potential would allow Italgas to leverage its core competencies in implementing the digital transformation of the Greek network along the energy transition path.

Italgas would have a positive impact on earnings per share: the increase would be “high single-digit” in the short term (5-10% in ‘22-‘23), “low double-digit” in the medium term (>10% in 2026), assuming 100% of the assets being consolidated. Given the current distribution policy, a positive impact on the dividend per share is also expected. The high growth profile, combined with the increased operational efficiency achievable in the medium term, offers attractive regulated returns.

In light of the financial characteristics of the transaction, Italgas’ commitment to maintain a solid investment grade rating would be confirmed.

The regulatory framework in Greece is well defined and transparent, with numerous similarities to the Italian one. The regulatory structure is RAB-based and is set by the Regulatory Authority for Energy.

Tariffs reflect business plans presented by the Company, including investments agreed with the Regulator.

With regulatory periods lasting four years, the next tariff review is scheduled for the end of 2022. The nominal return for the two-year period 2021-22E is 7.03%, with an implied tax rate of 24%.

Italgas expects the regulated returns on the DEPA network to remain stable, considering the significant gas investments needed in Greece to replace the lignite and coal currently used.

Investments that meet specific criteria allow for an additional return of 1.5%. The regulation also provides for a downward protection mechanism, as it allows for compensation in case of under-recovery of regulated revenues.

Lasty, the long duration of the concession periods (until 2043, with additional 20-to-30 years of potential extension) provides Italgas with the ideal framework to implement its long-term strategic vision. Through the DEPA Infrastructure acquisition, Italgas would become the incumbent operator in Greece for the next decades.

Italgas’ offer has been much appreciated as in Greece the Group can put into play its solid experience and advanced digital expertise in the development of energy infrastructure; this will accelerate the country’s decarbonization  process through the laying of flexible and intelligent digital native pipeline networks, ready to accommodate renewable gases such as biomethane, green hydrogen and synthetic methane. Additional opportunities may also be represented by the laying of fibre optics along the network and the development of small-scale LNG, which the Italgas Group is able to carry out.

Italgas will acquire DEPA Infrastructure through a BidCo, a dedicated Italian “business and industrial development company”, fully funded via intercompany debt.

For the 100% of DEPA Infrastructure capital, Italgas has committed to pay €733 million: a value that would imply a premium on the estimated 2021 RAB of slightly less than 25%.

On 10 December 2021, Italgas has signed a Sale and Purchase Agreement for the acquisition of 100% of DEPA Infrastructure S.A., after the conclusion of the tender procedure. The closing of the deal is expected to be signed in early 2022 at the latest, once the required authorizations, including that of the Antitrust Authority, will be obtained.