The Spanish company Iberdrola is selling 8,534 MW of natural gas in Mexico for 5.5 billion euros to a local public fund.
The sale will allow the company to strengthen its financial position, reduce debt and focus on renewable projects in the United States and Europe.
The transaction will also improve the company’s relationship with the Mexican government and bring forward its carbon emission reduction targets for 2040.
Iberdrola, the Spanish company dedicated to the production, distribution and commercialization of energy, assures that with the massive sale of 8,534 MW in Mexico to a local public fund for 5.5 billion euros (6 billion dollars at the exchange rate of this Friday, April 7), both parties benefit.
In other words, it strengthens the relationship with the Mexican government and opens up new opportunities in the United States and Europe, as the company explained in a meeting with investors on Wednesday, April 5.
In line with the strategic plan presented to the market at the end of last year, which included strong investments and divestments focused on the goal of reducing carbon emissions, the Spanish company announced this week the sale of natural gas assets in Mexico, ending a long period of tensions with the country’s authorities.
Once the deal and regulatory approvals are finalized, the business group expects the operation to be completed before 2024, it said in a report filed with the National Securities Market Commission (Comisión Nacional del Mercado de Valores).
Iberdrola’ s shares continue to rise and are among the most bullish on the IBEX 35, the benchmark stock market index of the Spanish stock market, with an increase of 2 percent.
The sale will mean some 5.5 billion euros of gross cash this year; the contribution of assets will have an impact on Ebitda of -500 million euros, although this is still pending accounting analysis, and of -80 million euros on net profit, as the company explained.
On the other hand, capital gains depend on the structuring of the operation.
The sale is part of the company’s 2023-2035 strategy, focused on network growth and taking advantage of opportunities in the United States and Europe, and with greater exposure to A-rated sites.
The operation, with which the Spanish company disposes of almost 75 percent of the installed power it owned in Mexico, will also mean an improvement in its debt ratios and a growth in its financial situation. Iberdrola assures that the sale was closed at an appropriate price and with a positive valuation.
According to the company led by Ignacio Galan, this operation is aligned with Iberdrola’s strategy and maintains the American country as a main market, with a combination of renewable generation and focused on private customers. The Spanish group maintains its presence in Mexico with 1,060 MW of renewables, 1,166 MW of combined cycle, 202 MW of cogeneration and a renewable option of 6 GW.
Iberdrola refocuses on renewables
The company’s new Mexican subsidiary will focus on renewables and customers; around 2,400 MW operational in Mexico (1 GW renewable); around 6,000 MW renewable for the exploration of new opportunities; it will sustain commercial activity and access to capacity to ensure supply to private customers in the country and will have a contribution of 365 million euros in this year’s estimated Ebitda.
In the operation, which has 12 combined cycle plants of 8,436 MW and a wind farm of 103 MW, there are 4 assets of 1,400 MW that are under litigation with regulators and will be transferred together with the assets.
The company assures that the sale strengthens the rotation of capital towards renewables, makes it possible to exceed almost 90 percent of the asset rotation goals and agreements in 2023-2035 (about 2 years earlier than estimated), strengthens the relationship with Mexico, improves the financial ratios and makes it possible to achieve the carbon emission reduction goals for 2040.
Analysis of Iberdrola’s operation in Mexico
Analysts celebrate the Spanish company’s sale in Mexico. “It is in line with its strategy”, say Bankinter, which emphasizes that it is a “great operation”. Among the most important points, experts highlight that the company avoids possible conflicts with the Mexican authorities, strengthens its financial position to reduce debt and invest in projects with greater potential.
In addition, the Spanish business group advances the achievement of goals of the strategic plan that revolves around the sale of non-strategic assets and the entry of external partners in new projects with high growth potential.
On the other hand, Jenny Ping, analyst at Citi, highlighted in a communication with the media that it is a very favorable operation because it significantly reduces the exposure to Mexico after the local political movement to reduce the foreign influence of energy companies.
Fernando García, member of RBC, told El País that he believes the operation “is positive for the Spanish company because it allows it to deploy cash in other sectors, due to the attractive valuation. In addition, the cash could alleviate leverage concerns and raise questions about its possible use,” he said.
Iberdrola had a significant amount of investments in Mexico’s energy sector. Over the years, the company had installed a total of 7,300 MW of renewable energy capacity in that country, making it the second largest power producer.
Iberdrola has been a major player in Mexico’s energy market since 1998, but it was not until 2015 that the company began to focus on renewables. Since then, Iberdrola had invested more than $6 billion in renewable projects, including wind farms and solar plants (these are the ones it did not sell now to the state led by Andres Manuel Lopez Obrador).
Iberdrola and conflicts with Mexico
Iberdrola’s investments in Mexico have not been without controversy. In 2018, the company clashed with the Mexican government over its decision to cancel a large wind farm project in the state of Oaxaca.
The government claimed that the project was not in the best interest of the local community, but Iberdrola disputed this claim and accused the government of favoring state-owned energy companies.
Despite this setback, Iberdrola had continued to invest in Mexico’s energy sector and faced competition from other international companies.
In 2020, it faced a challenge from Italy’s Enel, which began construction of a new wind farm in the state of Coahuila.
Until before the sale became known this week, Iberdrola had announced plans to invest an additional US$4 billion in renewable energy projects in the country by 2025.
INVESTOR TIMES is an independent publication of economic, finance and investment content. Our expert analysis and carefully curated news empower you to make informed decisions in the complex world of finance. Stay ahead of the curve with our timely articles and gain valuable insights from industry experts.
Any information contained in INVESTOR TIMES is for educational and/or informational purposes only, it is not financial and/or investment advice. The site owner and author are not liable for any actions taken based on the information provided. INVESTOR TIMES may obtain economic retribution by recommending services or products of third parties. INVESTOR TIMES does not accept, nor will it accept in the future, subsidies or funds from Governments, political parties or public institutions.