Risk outweighs benefit from a potential minority investment by EDF in Areva.
French press reports suggests that EDF is considering a bid for a stake in Areva. EDF management had previously ruled out any minority investment in Areva. The change of mind could have various origins, but we gather the market will take a specific interpretation, the political one, as the most probable.
EDF’s investment would be concentrated onto the former Framatome activities, ie nuclear build, engineering and services. Below, we consider the potential positives and negatives.
Tighter integration of the nuclear engineering capacity could yield a benefit to EDF’s nuclear new build. Integrated execution could lead to improved project management, greater timeliness, in tandem with it materially lower financing cost. Ultimately, EDF should be able to build at lower cost per MWh and ease the case for new build. It will not likely reap any enhanced benefit of standardization, because according to our calculation its capex strain is too great to deliver a larger new build fleet within a shorter than currently envisaged time frame. And, permitting and external processes do not correspond fully to the required background environment for that either. Lastly, its new build is (other than the UK fleet) geographically diverse.
It is uncertain whether EDF would have real operational influence in such a way that would benefit its own new build programme. Reportedly, EDF has made an investment conditional upon majority control of the above mentioned activities. It could thus be a manager, but would not be a capital allocator to these activities from the wider Areva group. It may have to rely on help from political powers’ interest in the business as the core of the French nuclear industry.
Assuming EDF achieves operational control, investors should consider EDF’s expertise. The company’s core skills are in power plant management and not necessarily in the OEM, construction and services parts of the business. Those demand very different expertise and management.
EDF would acquire exposure to a business with great litigation risk and liabilities. Amongst others, investors should have questions on their mind regarding liabilities relating to existing projects but also future litigation risk management. They might remain with Areva, but ultimate exposure might still be there.
EDF’s ability to source a global nuclear new build order book and execute on it for the business also merits a thought. The French government’s commitment to reduce nuclear from 75% to 50% of electricity production deprives it of domestic growth. There might be growth potential for the utility business as future operator or stakeholder of plant to be built in new geographic markets. But, the company would be taking on a big task.
It is worth noting, that China, the most important global market for nuclear new build, is increasingly developing its own technology. Western suppliers’ share is continuously falling.
EDF might be in control of operations, but it will not be in control of capital allocation to the business, other than from its own sources. And those are constrained by the heavy capex burden over the next years.
There might be some relief on return on capital. If EDF could classify the investment as dedicated asset offsetting against nuclear liabilities, there would be a lower ROCE requirement. The trouble is the risky nature of the business to which is not akin to such a view.
Any transaction would highlight the prevalence of industrial policy over corporate management. The state intervention overhang weighs heavily and repeated reminders are unhelpful for market perception with regards to overhang.
The reality is not far from perception. In the event of a transaction, there would be many points where various interests cross and many issues of conflict. Political intensity of the company’s profile would certainly increase.