Beijing Enterprises fails to impress investors with maiden overseas acquisition
Shares tumble after it agrees to pay 1.44 billion euros for two German operators of waste-to-energy projects
Shares of Beijing Enterprises (BJE) tumbled as much as 10.4 per cent after it agreed to pay 1.44 billion euros for two German operators of waste-to-energy projects in its maiden overseas acquisition.
But BJE, the Hong Kong-listed investment arm of the Beijing municipal government in the gas distribution, water treatment and brewery businesses, said it may sell over 50 per cent of the companies – EEW Holding and M+E Holding – to be acquired.
It plans to invite “strategic investors” on the basis that it remains the single largest shareholder, the company said in a filing to Hong Kong’s bourse late on Thursday.
“The acquisition represents an opportunity for the group to expand its [waste-to-energy] business, and allows the group to consolidate and enhance its industry position, while introducing advanced
management expertise and related technologies to the [China] market, thereby improving
management and operational standards in the industry in China,” it said.
The deal’s announcement has not won investors’ hearts though. Beijing Enterprises’ shares closed down 7.6 per cent at HK$35.15 on Friday.
“The target asset has limited synergies with BJE’s existing business portfolio in China ... and the company has limited track record of operating unregulated assets overseas,” Credit Suisse’s regional head of utilities research, Dave Dai, said in a note on Friday.
The acquisition price, which represents around 10 times earnings before interest, taxes, depreciation and amortisation (ebitda), was also higher than the nine times of similar asset transactions in recent years, he added.
The acquisition price represents 21.9 times the acquired firms’ combined net profit last year, which Dai said was in line with their European waste treatment peers, but higher than BJE’s own multiple of 8.5 times.
Together, EEW and M+E operate 18 waste-to-energy plants in Germany and neighbouring nations, which BJE said were “some of the most developed and stable waste management markets in Europe”.
With total waste treatment volume of 4.4 million tonnes last year, EEW and M+E together has a 17 per cent share of the Germany waste management market, according to BJE.
Dai said Germany’s waste-to-energy industry was not subject to regulated market entry, tariffs or returns, with waste processing fees, which account for 50 to 60 per cent of operators’ revenue, subject to competition.
“Oversupply put significant pressure on [processing] fees from the mid-2000s to 2013, but pricing has improved significantly in recent years as excess capacity has been filled by imports of waste [from Britain],” he said.
The remaining 40 to 50 per cent of operators’ revenue was driven by the prices of power and recycled scrap metals, which had been under “sustained pressure,” he added.
Credit ratings agency Standards & Poor’s yesterday put BJE’s ‘BBB+’ long-term corporate credit rating on watch with negative implications pending more information on the acquired firms’ business and financial risk profile, citing its expectation that BJE’s financial strength will weaken after the acquisition.