On a high: Enel chief risk officer Claudio Machetti
The past 24 months have seen Italian energy provider Enel acquire Spanish counterpart Endesa, face threats of a credit downgrade from Standard & Poor's, and launch a successful €8bn rights issue, the largest ever by an Italian company. Writer Edward Russell-Walling
It has been an extraordinary two years for Italian energy provider Enel, beginning with the acquisition of its Spanish counterpart Endesa, and ending with the largest rights issue in Italian capital market history. The two are very much connected, though a rights issue was not what Enel originally had in mind.
In 2007, shortly before the financial world changed forever, Italy's largest power utility teamed up with Spanish construction group Acciona to make a €42bn bid for Endesa. Enel ended up with 67% of the company and signed a €35bn syndicated facility to pay for it.
The loan was in three parts - €10bn repayable in one year, €15bn over three years and €10bn over five years. "The five-year tranche was very important in the light of what then happened in financial markets," says Claudio Machetti, Enel's head of finance throughout this period but now in the newly created post of chief risk officer.
The aim was to refinance this in the long-term debt markets and via asset disposals. Having not visited the bond markets since 2004, Enel issued the equivalent of €5bn in the European market in June 2007, $3.5bn in the US market in September and €2.3bn in the Italian retail market in November.
Change of plan
The appalling state of the financial markets has obliged Enel to change its plans. It didn't return to the bond markets at all during 2008, though the sale of some Endesa assets to E.ON allowed it to repay another €8.4bn of debt. And the adventure was not over yet. Enel and Acciona had well-publicised problems agreeing on how Endesa should be managed. Acciona had a put option to sell its 25% stake to Enel for a, by now, somewhat inflated price of €11bn and at the end of 2008 the two began negotiations. By February this year they had finalised a deal.
Enel paid a little over €8bn in cash for the stake, with another €2.8bn in renewable energy and other assets. At the same time, Enel secured €8bn of five- and seven-year funding (unusually long for the prevailing climate) via a swap-like transaction with Acciona's existing lenders. "It was very tough to get these terms, since they were negotiated in November and December 2008," says Mr Machetti. Nonetheless, the general view is that the banks were happy to exchange Acciona's risk for that of Enel.
Credit warning
By now, Enel's credit rating was coming under pressure. In January, Standard & Poor's warned that it might downgrade its A- rating, pointing to its "weak" capital structure, delays in asset disposals and refinancing risk. The long maturities on the €8bn loan were helpful, but it was felt that an equity injection was needed to stiffen the financial structure. The board approved a rights issue in March, fully underwritten with the exception of the Italian state's 30% entitlement. The relevant state institutions indicated that they would fully exercise their rights.
The 13-for-25 issue was finally launched at the end of May, with the rights priced at €2.48, a discount of some 30% to the theoretical ex-rights price, though Mr Machetti notes that the discount to the average share price over preceding months was closer to 25%. Led by Intesa Sanpaolo, JPMorgan and Mediobanca, the issue would raise just short of €8bn, making it one of the biggest in Europe this year as well as the largest in Italian history.
Getting the message across
One of the complicating factors was the large number of retail investors - 1.3 million of them - on Enel's share register. Persuading private shareholders to take up their rights has always been a trickier proposition than marketing to institutions, and Enel mounted an ambitious advertising campaign on television, radio and the Web to get its message to even the most remotely located shareholders. In the end, a satisfying 85% of retail investors subscribed.
The overall subscription level was 99.6%. "Achieving high retail participation was crucial for the success of the entire rights issue," says Mr Machetti.
That success has spelt good news for Enel. Importantly, it has removed the threat to its credit rating. S&P recently confirmed its A- grade and shifted the outlook from "negative" to "stable".
"It has also completely reopened the bond market for us," says Mr Machetti. "Without the rights issue, we could have gone to the market, but only for a small amount and at a very expensive cost." Whether Enel returns to market any time soon is no longer Mr Machetti's department. But it wouldn't come as a surprise.
