There will be relief on the news: EDF has sheltered itself from the major risks related to Areva’s reactor business. Strong nuclear performance in H1, in line results and reiterated guidance will also contribute to some improvement in sentiment. One of our big concerns, overhang from the Areva deal, is removed. Still, execution risk has increased without a doubt. EDF will need to strongly communicate on execution and also financial and reactor cost benefit and its improved positioning in the global market.
EDF has outlined the terms of the Areva deal. It will acquire 75% of Areva’s reactor business for Eur 2.7bn. As per the previous numbers, this implies a take-out multiple of 0.75x sales. EDF will submit a binding offer in Q4 15 and is looking to close the deal in H1 2016. According to EDF, the deal will be cash flow neutral in 2018. That again will lead to some relief reaction.
A new dedicated joint venture to be held 80% by EDF and 20% by Areva will be set up for new reactor exports. We see that as a positive for streamlining and efficiency of the international business.
EDF is looking to bring in partners so that eventually it may own 51% of the business. Note, however, that there will be a three way management situation. EDF’s majority ownership gives some comfort in terms of efficiency as far as control goes.
Management has said it has already received indications of interest. We would not be surprised for such interest to come from potential Chinese partners.
The big relief is that EDF is completely immune from all risk relating to the Finnish project. It is also a positive that it will be in full control of the Flammantville and Chinese projects. That should help with execution, which we see as the key element for success in new nuclear.
Along with results in line with guidance (net income Eur 2.5bn, flat y/y) and reiterated guidance (nuclear output 410-415TWh), all of the above should lead to a relief reaction on the share price.
If indeed Chinese partners were to enter the EDF/Areva venture this could bring the global nuclear sector down a path that we have anticipated for a while: Chinese project execution skills could reduce risk and with it the cost of new nuclear. Chinese managers and developers would become more important in the nuclear sector globally. New nuclear might become more viable from a cost perspective.