EDP and the company that no one loves

There is long-term thinking, medium-term thinking and EDP thinking. This is a company I seem to love to hate.

EDP is the biggest utility in Portugal by far. EDP was a state company and recently it was privatized and sold to the chinese China Three Gorges. The Chinese came as saviors in a time of great pain with the European debt crisis. That went well, until 2018, when CTG made an offer to buy the remaining ~25% to reach a controlling share. They offered 3,26€ per share, which was pretty cheap considering the low premium.

EDP’s assets in key markets like USA and Brazil would be valuable for CTG’s global expansion. Although the chinese said that the headquarters would remain in Lisboa, probably the company would be chopped off its strategic assets and just let some portuguese plants remain in EDP.

EDP’s management was against it, as they usually are for the wrong reasons, and started to swallow some poisonous pills.

in EDP’s 2018 results

First there were regulatory issues, given that EDP is a multinational utility provider. That took its time. Only Brazil gave its green light. In the middle of a trade war, USA’s would be trickier. And yet it was the portuguese regulator that proved decisive.

Then it sought to make itself appealing to other ‘big guys’. Elliott Management bought a small stake of less than 3% and began to criticize the Chinese offer as cheap. It also proposed the sale of EDP Brazil to unwind hidden shareholder value and to bring the company’s debt down. Net debt/EBITDA was a cool 4,01x. Elliott said the company was worth 4,33€, a third more than CTG’s offer.

Then came Engie, the huge french utility. Together with EDP a joint venture was created into which assets of both companies were thrown. EDP invested more and yet it has the same 50% stake.

The establishment of the JV with Engie are 50-50 percent. I think it’s relevant, offshore will be an important element for our growth throughout the plan, but also throughout the period out after 2022. And we expect to show significant growth over the next decade. So with Engie, we have created really the top 5 wind off-shore player.

We believe that this partnership will reinforce our competitiveness in this area giving our complementary competence and I think it’s important complementary capabilities to achieve large scales of operations, which are required to succeed in such a capital-intensive business. This JV is also I would like to stress is a natural development for 2 companies that have been partners in several wind projects since 2013, so we know each other well. The JV will have a dedicated team and share control governance with the first CEO being proposed by EDP and the COO and Chairman by Engie, followed by a rotation agreed after 3 years mandate. The JV has 4 wind off-shore projects in construction stage, are with feed-in tariffs already secured spread around 4 geographies and include fixed and floating off-shore technology representing a total capacity of 2.5 gigas.

July/2019 EDP Conference Call

About a year after the offer to buy EDP, the Chinese forfeited. A while later they sold a bit.

What remained of EDP after this year?

A company that increased its debt, although it was already high. It is addressing that by selling hydro plants to pay down debt, which in the language of EDP is called ‘asset rotation’.

The kicker comes in the new name for this debt. It isn’t common debt like every other company’s. No, it’s green debt, because they’ll buy solar panels and stuff. The fact is that they need this financing, because there’s no organic growth. Utilities are struggling with this everywhere.

Com estes resultados, e apesar dos investimentos terem elevado a dívida da empresa liderada por Manso Neto para os 3.060 milhões de euros, o conselho de administração revela que “irá propor, em assembleia geral de acionistas, uma distribuição de dividendos de 61,1 milhões”

in https://eco.sapo.pt/2019/02/27/edp-renovaveis-lucra-mais-de-300-milhoes-dividendo-sobe/

What’s bad is that management keeps the shareholder’s return as a dogma, although that is very short-term thinking now. The company should address its debt more vehemently and yet it doesn’t seem to care about it. Just now that every company is slashing its dividend to keep liquidity to face covid economic fallout, EDP goes maniacally the other direction. It not only didn’t postpone or slash its dividend, it paid it in the same amount as last year’s. That’s almost 700M€. What’s even more absurd is the retained earnings of 2,5%.

EDP dividend proposal for 2019’s results

That makes sense when the chinese, the americans and the french have no long-term vision for the company and want to take as much capital as possible out of EDP and invest it elsewhere. That has worked so far with the appeal of green debt. EDP has stayed close to the 4€/share.

EPD 2 years share price

There’s a bad history of major Portuguese companies being squeezed for profit and then sold to the highest bidder (PT, Cimpor) and taken apart. I think EDP is merrily going where others have died before.

That’s what comes from a management that got to keep its job and now needs to please its shareholders. There is however a bigger issue here that is the overweight of foreign capital in major portuguese companies and their dependency on debt for financing. It would be nice for portuguese to invest more in their home companies, but that’s another story.

Originally published on 16/05/2020

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