National Grid: Western Power electricity deal should create a buzz

Utility timeframes are measured in decades. The dip in National Grid shares following news of a deal to acquire Western Power Distribution should therefore be ignored. The complicated £14bn deal with PPL will increase National Grid’s exposure to valuable renewable energy trends.

Western Power Distribution is the UK’s largest electricity distribution network and one of the local suppliers that plug into National Grid’s transmission network. The switch to electric vehicles and a move away from gas heating for homes is expected to lift electricity demand. This is reflected in the 60 per cent premium that National Grid is paying over WPD’s regulated asset base. Not only is that near the top of market expectations but the funds required will raise National Grid’s debt.

As well as buying WPD, National Grid will sell PPL its Rhode Island power operations in the US. The £3.7bn enterprise value will finance less than a quarter of the WPD purchase. Later, National Grid plans to dispose of a stake in its UK gas transmission business. In the meantime, debt as a share of capital will increase from targeted levels of about 60 per cent to the high 70s. 

The question is what sort of price National Grid will be able to secure for its gas business. Gas assets create less of a buzz than electric ones. While gas does have green energy potential in provision of hydrogen, those prospects are a long way behind electricity. Still, a regulated asset value of £6.3bn for National Grid’s gas transmission business might attract a premium of up to 30 per cent in a sale, thinks Bernstein. A 51 per cent stake sale might raise £2.1bn and take National Grid’s debt level back towards target levels.

There might seem to be a faulty link in big transactions carried out at large premiums when National Grid’s equity value is close to the value of its regulated assets. Blame short-term market moves for that. Once the potential premium for the gas business is clarified, the deal for Western Power will be too.

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