Shell launches $617 million takeover bid for ERM Power

Global energy giant Shell has launched a $617 million all-cash takeover bid for local electricity retailer ERM Power (ASX: EPW) in an effort to expand its gas marketing and trading capability in Australia.

The Dutch major will acquire ERM through its subsidiary Shell Energy Australia, established in 2017 to offer wholesale gas customers on the country’s east and west coasts with security of supply in a market with few players.

The acquisition will be made via a scheme implementation deed based on a cash price of $2.465 per ERM share, representing a 38.4% premium to the one-month volume weighted average price per ERM share (to 21 August) of $1.78.

Although dependent to shareholder approval, the deal is not subject to regulatory or financing conditions or further due diligence.

Shell has confirmed its bid has received clearance from the Foreign Investment Review Board and the Australian Competition and Consumer Commission.

Should the takeover not proceed, the scheme requires Shell to receive a reimbursement fee of approximately 1% of ERM Power’s equity value in certain customary circumstances.

The takeover bid comes as Shell has been exploring opportunities to expand its electricity business globally, with ambitions to build a strong energy generating and retailing business in Australia within the decade.

If the takeover is approved, ERM will become Shell Energy Australia’s core power and energy solutions platform and signal a step forward in growing the giant’s local presence.

Unanimous approval

ERM founder and major shareholder Trevor St Baker – who currently holds 68,554,916 shares equating to approximately 27.39% of the company – has confirmed he will vote in favour of the scheme, in the “absence of a superior proposal”.

ERM’s board and management have also unanimously welcomed the scheme, saying it “recognises the business’ strategic value and success in becoming a leading Australian energy company”.

“ERM has grown rapidly to become the second largest electricity retailer to commercial and industrial customers in Australia [and we believe] our strategy across electricity supply and demand aligns well with Shell’s global electrification and energy solutions ambitions,” said chief executive officer Jon Stretch.

“This [takeover bid] is a strong demonstration of the success of our strategy, the capability of our people and our ability to grow an electricity generation, energy retail and solutions business which supports the transition to renewables.”

ERM’s board has also declared a fully-franked ordinary dividend of $0.045 per share payable in October and a special dividend of up to $0.085 per share prior to implementation of the scheme if it receives shareholder approval.

The dividend announcement was released today with ERM’s 2019 full-year results.

Peaking power

Since its 2007 inception, ERM Power has grown to become the nation’s second largest electricity provider to Australian commercial and industrial businesses by load.

The company helps clients navigate the growing cost, complexity and volatility of energy markets with a strategy focused on meeting end-to-end energy supply and demand needs through innovative advice and products.

Mr Stretch said ERM places strategic value on its gas-fired peaking power stations at Oakey in Queensland and at Neerabup in Western Australia as the market moves more towards renewables solutions such as wind and solar energy.

Peaking power stations run during peak hours of electricity demand – such as afternoons when businesses can be at their busiest – and generate a generally-higher energy price than baseload stations which run continuously throughout the year.

“Our 2019 results demonstrate continued performance against our stated strategy which is all about helping businesses take control of their energy consumption and costs, and optimising their energy productivity,” he said.

Operational highlights

During the 2019 financial year, the Neerabup peaking station continued a strong operational performance with 98.4% availability and no unplanned or forced outages in a market characterised by a steady increase in small-scale rooftop solar panel installations.

“Rooftop solar has the effect of reducing electricity demand in the middle of the day without impacting peak demands in the morning and evening,” the company said in its 2019 annual report.

“With mild weather conditions, comparatively low generator outages and additional generation from low marginal cost, large-scale wind and solar facilities, the electricity price in the ‘daylight’ periods in the wholesale electricity market continued to fall.”

Neerabup was well-placed to take advantage of changing market conditions without being impacted by falling daylight period demand.

Low delivered gas prices and continued high electricity prices in the ‘peaks’ allowed for the facility to continue operating at high generation levels – the station operated at 6.2% capacity over the period compared to 8.36% in the previous year, reflecting reduced generator outages and changes in generator pricing.

ERM said Oakey also performed “exceptionally well” during the year at 100% availability and 0.6% capacity compared to 91% and 2.5% respectively in the previous year.

The National Electricity Market in which Oakey operates also saw an increase in rooftop solar panel installations in Queensland, with electricity demand falling during the middle of the day and peaking in the morning and evening due to underlying demand growth.

Neerabup and Oakey delivered a combined earnings before interest, tax, depreciation, amortisation and fair value adjustments of $41.4 million for the 2019 period.

At mid-afternoon, shares in ERM were up 42.15% to $2.445.