Forget about the financial result, ERM Power Ltd [ASX:EPW] had bigger news to share this morning. The retail electricity provider is now likely to tie the knot with Shell Australia.
At time of writing, shares in ERM are up 42%. Closely matching the $2.465 per share bid that Shell has made for the company.
Overpaid or understated?
The takeover won’t come as too much of a surprise to those who have been picking up the hints from Shell. Plans for a retail energy expansion had been on the cards for a while.
However, what may shock some is the size of the offer.
Shell’s bid has valued ERM at $617 million. That’s a 43% premium over the stock’s previous close, and a 38% premium over the monthly average.
On top of this, ERM’s final result was a bit of a mixed bag. Despite posting a statutory net profit of $123 million, earnings shrunk by 7% for the financial year. Meanwhile earnings per share also withered, down by 15%.
This could prompt questions as to whether Shell may be paying overs.
ERM shareholders will know that it has been a year of ups and downs. The results don’t accurately reflect the structural changes behind the scenes. As such, there could be room for a counterargument that Shell is actually getting a bargain.
It will all depend on how much growth ERM has to offer. If CEO Jon Stretch is to be believed, it could be considerable:
‘Pleasingly the forward contracted load at year end was the highest on record at 32.2TWh having grown 11% in the 12 months to 30 June. Load during FY19 was lower than the prior year due to the sale of the SME single site portfolio and the loss of two large customers but the outlook for FY2020 is a return to about 18.5 TWh based on forward load.’
What Stretch is saying is that demand is increasing. And that is despite selling some parts of the business and losing two key customers.
Fight for an energy future
As it stands it’s looking likely for this takeover to proceed. ERM’s board and management have already given their blessing. It’s really just up to shareholders to give the final tick of approval.
More fascinating is the implication of this takeover for broader energy markets. Reading between the lines it may signal broader movements across the sector.
My colleague, Greg Canavan, has been watching these movements for a while now. But, he believes the real energy boom isn’t in gas or oil. No, investors should really be looking at uranium! You can find his thoughts in full, for free, right here.
For Money Morning
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