Vattenfall Sells German Power Grid To Elia, IFM For EUR810 Million

Utility Vattenfall Europe AG said Friday it has agreed to sell its German power transmission grid to a consortium comprising Belgian electricity grid operator Elia System Operator (ELI.BT) and Australian infrastructure fund Industry Funds Management.

The transaction is the second cross-border electricity grid sale announced in Germany in three months, opening the way to promote the further convergence of European energy markets--a declared goal of the European Union.

"This transaction represents a major step forward in the construction of a European electricity market that Elia has been supporting since its inception," Elia said in a press statement.

At a press conference in Berlin Elia Chief Executive Daniel Dobbeni said the company is committed ensure reliable electricity supply and pledged to make the necessary investment in Germany to build new cross-border interconnectors and grid extensions to expand the supply of renewable energies--in particular offshore wind electricity.

Vattenfall Europe, a unit of Swedish state-controled Vattenfall AB, previously said such investment would total around EUR3 billion through 2016.

Earlier this year E.ON AG (EOAN.XE) completed the sale of its German power transmission grid to Dutch electricity operated network operator TenneT TSO BV.

Contrary to E.ON, which sold the grid on pressure from the European Commission in an antitrust dispute to promote competition and the creation of a single European energy market, Vattenfall sold the grid voluntarily as it no longer considered the business part of its core operations.

The agreement between Vattenfall and the buyer consortium foresees that Elia will acquire 60% of the power grid company called 50Hertz Transmission GmbH, while IMF will own the remaining 40%.

Elia and IFM are paying EUR810 million for the asset, including around EUR320 million for a shareholder loan provided by Vattenfall to 50Hertz. The shareholder loan will be redeemed by Elia on completion of the transaction, which is expected in the second quarter of 2010.

E.ON sold its transmission grid to Tennet for an enterprise value of around EUR1.1 billion, which included around EUR215 million cash held by the business.

At 10,700 kilometers the grid sold by E.ON is slightly larger than Vattenfall's 9,700-kilometer, ultrahigh voltage power network.

Looking at the relatively small difference in grid size E.ON appears to have achieved a better price for its grid, with an agreed equity value of around EUR885 million.

The Vattenfall-Elia transaction was for an equity value of around EUR480 million, when deducting the shareholder loan.

Vattenfall Europe CEO Hatakka said it was too early to comment on the expected book gain from the sale.

Elia said it intends to finance the purchase of Vattenfall's grid through a capital increase.

At the press conference CEO Dobbeni said he doesn't expect the acquisition to hurt the company's credit ratings.

"I'm convinced that we can show that our current ratings are good," even after the acquisition, Dobbeni said.

In January, when Elia officially announced its interest in the asset, credit rating agency Standard & Poor's Ratings Services said it placed the company on CreditWatch with negative implications for its 'A-' long-term corporate credit rating.

S&P said at the time that an acquisition could materially weaken Elia's business and financial risk profiles that may no longer qualify for the current ratings given no merger and acquisition risk were assumed.

Elia also said Friday that it expects to generate some synergies from the acquisition of 50Hertz, mainly in terms of sharing of best practice in areas such as maintenance and operation of the grids. Dobbeni, however, declined to quantify the synergies at this point in time.

Elia said the purchase of the Vattenfall grid would make it Europe's fourth largest transmission system operator, with an ultrahigh-grid stretching more than 13,000 kilometers and supplying over 29 million residents.

The company was competing for the 50Hertz grid against a financial consortium comprising Goldman Sachs Group Inc. (GS), Allianz SE (ALV.XE) and Deutsche Bank AG's (DB) infrastructure fund RREEF.

-By Jan Hromadko, Dow Jones Newswires; [phone]; [e-mail]