Wednesday, January 19

The Villarejo case hinders Iberdrola’s growth in the US

The imputation of Ignacio Sánchez Galán, president of Iberdrola, in ‘the Villarejo case’ begins to have consequences for the electricity company beyond the negative headlines and the reputational impact.

In particular, this case is weighing in a very special way in the deliberations that are being made within the Regulatory Commission of New Mexico (USA), which must give the green light to the purchase of PNM Resources, one of the large electricity groups from the states of New Mexico and Texas.

The concern of the New Mexico institution is reflected in the request it made to the Spanish power company to respond to a detailed questionnaire about its role in the Cenyt case (which the listed company responded on July 27).

A non-binding technical report rejects the sale to Iberdrola

But the doubts should not have been completely cleared up after receiving the completed questionnaire because, after receiving the answers, the technical service of the institution made a report in which it proposed to reject the operation due to possible conflicts of interest in the corporate structure of Iberdrola and other concerns, such as the consequences of the Villarejo case for the company in Spain.

Mention was also made of the “poor record” of Avangrid, Iberdrola’s subsidiary in the United States, in the management of public services in the northeast of the country.

Consequently, the majority of the members of the New Mexico Regulatory Commission have cast a preliminary vote accepting the technical service report, in which the purchase operation was rejected. Specifically, 3 of the 5 directors have voted in favor of rejecting the operation, as has recently been known.

A non-final obstacle

The decision of the New Mexico Regulatory Commission is not totally final, since a new hearing of the commission is still pending, where the defenders of the operation will speak. The final vote will take place between December 8 and 15.

In addition, Iberdrola could appeal to the Supreme Court of New Mexico, although this process could take a long time.

Still, analysts believe it is a major roadblock.

“The rejection of New Mexico is bad news for the group. Iberdrola has an 81.5 percent stake in Avangrid, which is the growth platform in the United States. The combination of Avangrid and PNM – with 4.1 million supply points, a regulated asset base of $ 14.4 billion, more than 168,000 kilometers of distribution and transmission networks and approximately 10.9 gigawatts of installed capacity – would accelerate the Iberdrola’s growth in the United States ”, says a recent Bankinter report.

But even tougher is the following statement: “Reputational and governance issues could begin to have direct implications on the group’s strategy and growth. If this trend is confirmed, we would reconsider our vision of the company ”.

Bankinter currently has Iberdrola with a “buy” recommendation and a target price of 11.90 euros, compared to the 9.96 at which it is currently trading.

The purchase of PNM by Iberdrola

In reality, the approval of New Mexico is the last remaining obstacle for the operation to come to fruition, following the authorization of Competition, the Committee for Foreign Investments (CFIUS), as well as the approval of the state regulators of Texas, of the federal for the area of ​​energy FERC, for nuclear safety (NRC) and telecommunications (FCC).

If this difficult obstacle was finally overcome, the value of the transaction would reach 8,300 million euros (4,200 of market capitalization and 4,100 of debt).

The purchase was recommended by PNM’s board of directors and the idea was to carry it out through a merger with Avangrid.

At current prices, Iberdrola’s stake in Avangrid is worth $ 17,369 million or $ 14,156 million, which represents 22 percent of the group’s capitalization.