Eni biofuels deal is rich bet on governments
Corrects first paragraph to reflect that 11.5 billion euros to 12.5 billion euros is the valuation for Enilive as a whole. The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
By George Hay
LONDON, July 23 (Reuters Breakingviews) -KKR’s KKR.N rich bet on biofuels is also rather a contrarian one. Italy’s $50 billion energy group Eni ENI.MI said on Tuesday that the U.S. buyout shop could take a 20% to 25% stake in bioenergy arm Enilive, in a deal that would value the unit at between 11.5 billion euros and 12.5 billion euros ($12.5 billion to $14 billion). Paying up for a sector that’s down in the dumps is smarter than it looks, with one caveat.
Biofuels refers to the process of creating renewable energy from burning plants and crops rather fossil fuels. The sector is having a rotten time. Europe’s biggest player, Finland’s $14 billion Neste NESTE.HE, has seen its share price drop over 70% since 2021. A surfeit of supply over demand, expected by Bernstein to last until 2028, has cratered gross margins and caused oil groups like Shell SHEL.L, BP BP.L and Chevron CVX.N to throttle back on certain projects. And the more electric vehicles (EVs) there are, the less need there is for fuels that act as a low-carbon version of petrol and diesel.
KKR’s proposed price doesn’t factor in these doubts. Neste currently trades on less than 8 times the 2.2 billion euros of EBITDA analysts are pencilling in for 2024, using LSEG data. KKR is effectively paying about 12 times, using Eni’s guidance of 1 billion euros of EBITDA this year for the unit.
KKR hasn’t taken leave of its senses, though. An International Energy Agency scenario that assumes the world hits net zero by 2050 requires bioenergy capacity to grow at an 11% annual clip until 2030. Bernstein analysts assume the global supply of renewable diesel and sustainable aviation fuel jumps from under 25 million metric tons a year in 2023 to over 40 million tons by the same date. Given current doubts about the speed of the EV rollout these figures aren’t pie in the sky, suggesting rising demand for Enilive.
Meanwhile, the unit may merit a premium. The business is vertically integrated, meaning it supplies its own cheap crops to turn into fuel, and is growing fast. If its projections for EBITDA to jump to 1.6 billion euros by 2027 come true, then the multiple paid falls below eight times.
Still, KKR’s punt is far from risk-free. That’s because it requires governments to stick to current policies like the European Union’s Renewable Energy Directive, which mandates a certain proportion of greener fuels in the energy mix. The catch is that renewable diesel is twice as expensive as the dirtier equivalent, while sustainable aviation fuel costs three times as much. In the last few years, both Finland and Sweden have tried on affordability grounds to cut the size of these mandates. KKR’s deal is an implicit bet that other countries won’t follow.
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CONTEXT NEWS
Eni said on July 23 it had signed a temporary exclusivity agreement with KKR on the sale of a 20% to 25% stake in its biofuel and smart mobility arm Enilive. The sale values the company at between 11.5 billion euros and 12.5 billion euros.
The final transaction is subject to agreeing definitive documentation. Eni said that the interest shown by institutional financial investors may lead to a further stake sale of up to 10% of Enilive.
Enilive plans to increase its biorefining capacity to more than 3 million metric tons by 2026, double its level at the end of 2023. It plans more than 5 million tons a year by 2030.
Eni shares were trading at 14.2 euros as of 0904 GMT on July 23, up 0.6%.
Europe's biofuels star Neste has had a troubled few years https://reut.rs/3LVfmU5
Editing by Liam Proud and Streisand Neto
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