Dalmore Capital has exited the sole consortium vying for Electricity North West (ENW), leaving the team hunting for a new bid partner after submitting an initial bid on Tuesday (26 March), sources said.
The UK fund manager co-led the consortium with Equitix and was instrumental in driving the strategy of the bid for the UK electricity distribution network operator owned by JP Morgan and First State.
Besides Equitix, the other members of the consortium are GLIL Infrastructure, a local government pension fund platform founded in 2015 by the London Pensions Fund Authority and the Greater Manchester Pension Fund, and Japan’s Kansai Electric Power Corporation.
InfraRed Capital Partners-managed HICL also did not submit a bid after failing to find a consortium partner, two sources said, leaving a line-up of largely only strategics left in the race.
Scottish Power, which owns the electricity grid Manweb in an area of northwest England and north Wales that borders the ENW grid, submitted a non-binding offer, three sources with knowledge of the process said.
Other potential bidders that examined bids for ENW included State Grid Corporation of China and China Southern Power Grid, as reported, although it was not clear if they did submit first round bids.
ENW operates across a region that covering 2.4m homes, stretching from Manchester to rural Cumbria.
Dalmore exited the consortium due to concerns over valuation, one of the sources with knowledge of the matter said. Dalmore, InfraRed, First State, JP Morgan, ENW, Iberdrola and Scottish Power declined to comment.
ENW’s regulatory asset value is around GBP 1.76bn, with any sale price likely to be in excess of GBP 2bn. However, people following the process said they expect the process to be highly competitive given strong demand and the scarcity of regulated UK assets that have come to market recently.
Concerns about valuation have also been compounded by ENW’s high cost of debt, which includes an 8.875% GBP 200m bond due in 2026 and a 6.125% GBP 200m loan due in 2021, according to its last reported financial results, for the year ended 31 March 2018.
ENW also faces the prospect of lower returns in coming years after the regulator Ofgem signalled it and other distributed network operators will face lower returns, from current levels of around 6%, for the next regulatory period beginning in 2023.
Although Ofgem has not yet outlined specific plans for returns during the period, it is expected to reduce returns, having already indicated it will sharply cut allowed returns for gas distribution networks from 2021 to 2026.
Analysts at Moody’s noted in a report in October that ENW’s outstanding debt is “materially more expensive” than that of other network operators in the UK and that the inflation swaps it has entered into will generate “material cash outflows” until the late 2030s.
The analysts noted that ENW’s total debt including swaps was equal to around 100% of its regulatory asset value.
ENW’s swap portfolio includes around GBP 110m of inflation-linked swaps due 2038 and GBP 84m due 2050. Companies such as ENW take out swaps to guard against rising inflation, but this can leave them with large liabilities when inflation is lower than expected.