Greece: Snam-led consortium and Reganosa shortlisted for DESFA sale
Greek privatization agency (HRADF) qualified two finalists to proceed to the second phase of a tender for the sale of a 66% stake in state natural gas grid operator DESFA. An investment scheme consisting of Italy’s Snam (50%) and Spain’s Enagas, Belgium’s Fluxys and the Dutch Gasunie (16.6% each), as well as the Spanish company Regasificadora del Noroeste, are the two bidders eligible to submit binding offers, according to Friday’s decision by HRADF and Hellenic Petroleum. The shortlisted candidates will sign a non-disclosure agreement and, subsequently, will obtain access to the operator’s infrastructure (virtual data room) for their due diligence purposes. HRADF holds 31% out of the 66% stake on offer, while the remaining 35% is held by Hellenic Petroleum. Under its third bailout program, Greece is obliged to conclude the privatization by the end of 2017.
The consortium of the four national gas grid operators, three of whom (Snam, Enagas, Fluxys) are also shareholders in TAP AG, is at the moment considered the undeniable frontrunner. It should be noted that Snam had teamed up with the Azerbaijani SOCAR during a previous tender procedure, while the Dutch state-owned entity Gasunie was equally interested in joining the scheme at the time. Presently, the Snam/Enagas/Fluxys/Gasunie consortium’s prospective success in securing the 66% stake could pave the way for DESFA to undertake operation and maintenance activities on TAP pipeline. That is to say that, instead of TAP AG establishing from scratch an ad hoc pipeline operator on the Greek ground, the shareholders could assign this task to DESFA, expanding its domain beyond regulated activities (operation of the national gas distribution network and the Revithoussa LNG Terminal). Such a scenario translates into distinctive benefits for both sides: TAP shareholders will save money by exerting majority control over an already existing operating company, whereas DESFA will significantly increase its income and extend its non-regulated activities. As Fluxys CEO recently pointed out on the Belgian daily Les Echos, the three companies’ participation in TAP pipeline project might give them an advantage over competitors in the DESFA tender.
Meanwhile, the Galicia-based Regasificadora del Noroeste, the so-called outsider of the competition, operates its own LNG import terminal in Mugardos since 2007, in addition to a 130km-long gas distribution network in northwestern Spain. Furthermore, from this year onward, it operates a smaller LNG import terminal in Malta.
Initially, expressions of interest were submitted by four more investment schemes: Macquarie Infrastructure and Real Assets (UK); a consortium composed of Romanian state-owned Transgaz and France’s GRTgaz; Integrated Utility Services (USA); PowerGlobe LLC (Qatar). The Transgaz-GRTgaz joint venture was numbered among the favorites to win the tender. However, it was excluded from going forward for final bidding because the GRTgaz doesn’t fulfill ownership unbundling certification requirements and, therefore, its qualification for the next phase of the process would constitute a violation of the Greek law 4001/2011 on ownership unbundling of transmission system operators, based on the European Commission’s Third Energy Package directives. The French natural gas distribution company Engie owns a 75% stake in GRTgaz.
Interestingly enough, the newly-launched tender resulted in the attraction of an overall number of six candidates, while antecedent privatization efforts had failed to gather an equivalent array of investors. This isn’t only due to Greece’s undisputed strategic position as one of EU’s energy gates, be it for Azerbaijani (via TAP), Russian (via Turk Stream and ITGI), Iranian or even Cypriot gas, but it largely has to do with the operator’s notable profitability, as well. In particular, DESFA announced a total of 206MM euros ($243MM) in annual earnings for FY 2016, signifying a 32MM euro rise ($38MM) in comparison to 2015. Nevertheless, there are still regulatory issues held in abeyance. For instance, the shortlisted bidders have put pressure on Greece’s Regulatory Authority for Energy to leave DESFA tariff levels and weighted average cost of capital unchanged until 2022. In addition, they’ve asked for further clarification of terms with regard to a 350MM euro ($413MM) recoverable amount (for past investments) that is to be demanded from DESFA through tariff charges over a 20-year period.
It should be reminded that, in 2013, during a previous call for expressions of interest organized by the Greek government, Sintez, a Russian private firm rumored to be indirectly controlled by Gazprom, seemed to have secured the acquisition of DESFA’s domestic gas pipelines with a $1.9bn bid, an amount five times higher than the estimated objective value of the network. However, the deal collapsed a week before the announcement of the Final Investment Decision on TAP pipeline project by the BP-led Shah Deniz consortium, as the European Commission intervened in calling for the mandatory application of its Third Energy Package directives on energy market liberalization. Thus, Gazprom was deterred from operating the Greek gas grid as a monopoly.
Soon after Sintez and another Greek-Czech group dropped out, a consortium of SOCAR (49%) and Snam (17%) proposed a 400 MM euro offer ($472MM) for the acquisition of the same 66% stake in DESFA. SOCAR had at the time been advised by the Commission to form a consortium with a European fully unbundled transmission system operator so that the Azerbaijani state-owned company would be able to abide by the Bloc’s third-party access rules. In November 2016, negotiations once again floundered, as the Greek government decided to legislate for a rise in DESFA’s gas tariffs by a lower amount than expected by SOCAR. Consequently, the Azerbaijani side declared their intention to purchase the share at 260MM euros ($307MM), implying the new legislative measures might reduce their chances of achieving profitability. Today, HRADF hopes that the new tender might match, or even surpass, the 400MM euro price that SOCAR had been offering, but this will mostly depend on the companies’ current commercial appetite, in combination with the state’s long-term commitment to regulatory reforms.