FD: Why did Shell miss out on the sale of Eneco?

English translation of an article published today by the Dutch FT: Why did Shell miss out on the sale of Eneco?

In retrospect, Shell’s bid was fairly hopeless.

Carel Grol

“We respect this outcome,” said Maarten Wetselaar, CEO of Shell New Energies, after missing out on Eneco. Photo: Peter Kovalev / ANP

In brief

• Mitsubishi and Chubu have been the new owner of energy supplier Eneco since the end of November.
• Counter-bidder Shell hoped to take a ‘green blow’ with the acquisition of Eneco.
• High oil efficiency requirements may have been detrimental to the oil company.

‘Shell must become a greener company? Well here we are. ”

Halfway through January 2019, Maarten Wetselaar, director of Integrated Gas & New Energies at Shell, is confident. The oil and gas company, together with pension fund PGGM, started bidding for Eneco. Even before the energy company is officially for sale. “Eneco is almost a model for what we want to achieve with our renewable energy division,” says Wetselaar.

Many Eneco followers thought the announcement was a smart move. Although Eneco generates a substantial part of its turnover from the gas trade, the company profiles itself as a sustainability champion. It has, rather than most energy companies, invested in wind and solar energy. And Eneco has an oiled marketing device.

The company with a head office in Rotterdam was in the hands of 44 municipalities. Selling such a ‘green company’ to a ‘fossil giant’ could possibly lead to polemic discussions in the municipal councils.

Self-proclaimed fans quickly set up crowdfunding to buy Eneco and, above all, to not let Shell take over.

That was an unfeasible publicity stunt given the billions Eneco had to deliver, but it did sign the sentiment. Shell made a clear gesture by coming out early. And fought it with an open visor.

In retrospect, Shell’s bid was fairly hopeless.

Staff satisfaction

On Monday, November 25, Mitsubishi and Chubu bought Eneco – much to the delight of the staff, who was cheering in Eneco World, the white office colossus on the outskirts of Capelle aan den IJssel. The Japanese companies offered € 4.1 billion. Including debt, they pay € 4.3 billion for Eneco. Shell’s offer is not public, but it is said that it was closer to € 3 billion than € 4 billion. Shell offered hundreds of millions less.

Couldn’t Shell pay more? That seems unlikely for a company that had $ 26.7 billion in ‘cash and cash on demand’ at the end of last year. The free cash flow in 2018 was $ 39 bln. A few hundred million euros is a lot of money, but that is certainly surmountable for Shell.

What was it then? It remained a statement by Wetselaar, barely 45 minutes after it was announced that Mitsubishi had won the bidding battle. “We believe that together with PGGM we have made a competitive bid for Eneco,” said a “disappointed” Wetselaar.
The ambition to further grow the electricity business remains: Shell wants to invest $ 1 billion to $ 2 billion annually in its New Energies business.

Efficiency requirements

The question remains why Shell then offered hundreds of millions less than Mitsubishi. Has Shell simply underestimated the competition? “Shell has misunderstood,” it sounds in the market.

The company itself does not want to say anything about the bid made. But everyone knows: Shell has strict return requirements. With acquisitions, Shell controls, among other things, the internal rate of return (IRR) – in fact the expected return on an investment. The IRR of oil and gas projects is on average 15%, Shell Australia wrote in a statement early 2017.

A Dutch banker who finances wind farms estimates that the IRR of a wind farm at sea moment varies between 6% and 8%. Eneco now encompasses considerably more than offshore wind farms, but it is evident that the Rotterdam energy company produces fewer high returns than an oil project.

Maarten Wetselaar demands renewable energy yields from 8% to 12%, he said this summer on Shell’s investor day. “We’ve said that many times.” He added, “North-West Europe is an interesting core market for us.”

Three bidders

In the end there were three bidders. Shell and PGGM were the only ones to report publicly. Mitsubishi was a name that sounded in the corridors at an early stage. The involvement of Rabobank was curious.

On July 18, via a message in the AD, that bank suddenly reported that it was cooperating with KKR, an investor. Rabo did not further motivate – and not afterwards – why it would be logical for a bank to buy an energy company. A spokesperson only emphasized that Rabo’s cooperative structure would suit Eneco.

The binding bids had to be received on Monday 4 November. Wednesday, November 13, De Telegraaf wrote that the battle for Eneco was a duel between Shell and PGGM and on the other hand KKR and Rabo. Even Shell CEO Ben van Beurden was working on it, the newspaper reported. The suggestion was clear: if the CEO of one of the world’s largest companies were personally involved in the transaction, it would be fine.

Run course

Saillant: at the time of the media offensive, the course had almost started. Two days later, on Friday, November 15, the CEO and CFO of Eneco met, a commissioner and four aldermen, plus a series of advisers. They made an ‘unanimous and joint’ assessment of the bids. They decided to continue with the Japanese, who rented an apartment in Amsterdam and had spent months silently working on their offer.

Because of their persistent silence, Mitsubishi and Chubu were perhaps the surprising buyer for the outside world. That Chubu Electric Power, Japan’s third largest energy company, was also involved, was not known until the winning bid came out. What can the Japanese do that Shell cannot do?

In any case, they can borrow cheaper. The expected return depends on the costs for financing, in accounting terms the wacc. That is ‘weighted average cost of capital’ for weighted average costs of equity (share dividend) and loan capital (interest on bonds). So: what does a company pay for every euro, dollar or yen of its financing?

At Mitsubishi the wacc has been around 5% in recent years. At Shell that is rather 8%, according to figures from Bloomberg. Shell therefore has higher financing costs than the Japanese conglomerate. The lower cost means that Mitsubishi can offer more for the same expected return.

Bridgehead

And maybe Mitsubishu just wanted it better. The company already worked with Eneco on two wind farms and a large battery in the north of Germany. “It’s a good cultural fit,” said Hiroshi Sakuma, Mitsubishi’s main adviser, in a conference room at Eneco’s headquarters when the deal was just announced. “Eneco must be a platform for future growth.” So a bridgehead for the European ambitions of the Japanese conglomerate.

But more than € 4 billion is a lot of money. How is Mitsubishi going to pay for that? “Based on thorough book research, we are convinced that this is worth it,” said Sakuma. “Without a doubt we can say that we have made a good investment.”

At that time Wetselaar had already sent his statement into the world. “We respect this outcome,” wrote Shell New Energies CEO. Perhaps he was restrained by the return requirements, perhaps he was out of competition. In any case, the connotation in the concluding sentence of his statement was somewhat economical: “We wish Eneco every success.”

Shell is Eneco’s dyed copper. Ultimately it is Hiroshi Sakuma who, on behalf of Mitsubishi, signs for the acquisition of the energy company on 25 November 2019. Photo: Olaf Kraak / EPA

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