EDF and BE strike a deal

1 October 2008

At the end of September, EDF agreed to a deal worth £12.5 billion to buy British Energy. EDF’s offer is for either 774p per share or, alternatively, 700p plus one ‘nuclear power note’ per share.

If the deal goes ahead, EDF said it would construct four EPR units, two each at Hinkley Point and Sizewell. On condition that EDF “is reasonably satisfied” it could proceed with the new units, EDF will dispose of land it has acquired at Wylfa. EDF recently secured a connection agreement with National Grid for 1670MWe capacity at Wylfa. EDF will also be obliged to sell land identified as suitable for new build at Bradwell on the condition that EDF “goes on to secure planning consent for two EPRs at Sizewell.” Similarly, conditional on securing planning consent at Hinkley Point, EDF would dispose of land at either Heysham or Dungeness.

The nuclear power note entitles investors to receive a share of so-called contingent value rights (CVRs) for a period of ten years. Note holders would receive annual payments if the performance of the 14 AGR units and single PWR exceeds a base level. The UK government, which has a 36% stake in British Energy, has agreed to the offer, along with 15% stakeholder Invesco – which blocked an earlier offer of 765p.

British Energy owns and operates 14 AGR units at seven sites – Dungeness, Hartlepool, Heysham 1, Heysham 2, Hinkley Point, Hunterston and Torness – and the country’s only PWR at Sizewell. The company also owns development land at Bradwell as well as the 1960MWe Eggborough coal plant. EDF owns and operates 58 PWRs in France, and is constructing an EPR at its Flammanville site. Its vertically-integrated UK subsidiary, EDF Energy, runs two 2GWe coal plants at Cottam and West Burton, and a 790MWe combined cycle gas turbine (CCGT) plant at Sutton Bridge. A 1300MWe CCGT power station, due to commence operation in 2011, is under construction at its West Burton site. The company has made a commitment to invest in around 1GWe capacity from renewables over the next five years.

Announcing the deal, Pierre Gadonneix, chairman and CEO of EDF, said: “Commissioning of the Flammanville EPR is scheduled for the end of 2012, just when the construction of the first EPR in Great Britain should be started.” He continued: “Four 1600MWe EPRs – the first of which will become operational by the end of 2017 – are gradually going to replace the generation capacity of the present advanced gas reactors that have to be shut down, except of course the Sizewell pressurised water reactor, which is going to work until 2035 at least.”

The European Commission (EC) Directorate General for Competition is expected to decide by early 2009 whether the acquisition is compatible with the common market (‘phase I’). Should the EC decide to initiate phase II proceedings under the European Commission Merger Regulation (Council Regulation 139/2004), the process could be delayed by several months.

The sale of the government’s stake in British Energy would raise approximately £4.4 billion, which the government said will be added to the Nuclear Liabilities Fund (NLF), bringing the total NLF to around £8 billion. The government claimed that this amount should “more than cover the current estimated costs of decommissioning liabilities of British Energy’s existing nuclear power stations.”

Meanwhile, Centrica has agreed to acquire a 25% shareholding from EDF after the takeover, at the same implied price per share as EDF pays for British Energy. Should it go ahead, Centrica would have the option of participating in EDF’s UK new nuclear build activities on a 75/25 (EDF/Centrica) basis. At the end of October, Centrica announced a £2.2 billion rights issue intended to help fund the potential acquisition of the stake in British Energy or other vertical integration opportunities.

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