Centrica Jumps on $3.6 Billion Sale of U.S. Energy Business

(Bloomberg) —

Centrica Plc is selling its North American energy business in a $3.6 billion deal as Britain’s largest household energy supplier seeks to focus on its home market. Its stock rose by a record.

The sale of Direct Energy to NRG Energy Inc. is a decisive move by new Chief Executive Officer Chris O’Shea as he seeks to convince investors he can turn the company around after it was demoted from the FTSE-100 U.K. benchmark stock index after 33 years. O’Shea is building on a restructuring announced last month to create a more simple business.

Read more about the Centrica’s restructuring here

The offer from NRG Energy felt “compelling”, O’Shea said on a call with reporters. “The more you can focus, the better your results can be.”

O’Shea doesn’t have an easy task as he attempts to change the course of a business that was in trouble before the coronavirus crisis. A miscalculation about where Centrica should focus its growth, a government-imposed price cap on household bills and a crash in global energy markets have all hit profits.

The Direct Energy sale “helps simplify the business back to U.K. customer focus and relives balance sheet pressure,” said John Musk, an analyst at RBC Europe Ltd. “We see these results as a clear positive for a stock that has significantly underperformed the sector year-to-date.”

The stock rose as much as 39{a25bda0f8ab6dac90e68079d6f038584ef6ac53f1f4621de3ad526e35cd6c0d6} to the highest for four months. But it only goes part way in offsetting Centrica’s 90{a25bda0f8ab6dac90e68079d6f038584ef6ac53f1f4621de3ad526e35cd6c0d6} decline from its 2013 peak. The utility plunged to a 23-year low earlier this year as investors lost confidence in the company’s strategy amid continued write downs and canceled dividends.

There was a delay in the publication of Centrica’s first-half results as the final details of the U.S. disposal were being agreed on, O’Shea said. The companies began exclusive negotiations for the sale in May.

“Talk about going to the wire,” he said.

Debt Reduction

The U.S. unit had been troublesome for Centrica in the past. In 2017, a surprise slump in earnings from its retail suppy business left investors concerned that management wasn’t fully focused on the U.S. market. The proceeds of the sale will be used to reduce net debt and to make contributions to the company’s pension liabilities. The deal is expected to complete by the end of the year.

The $3.6 billion cash deal was based on an “attractive valuation” for Direct Energy equivalent to an enterprise value to 2019 earnings before interest, tax, depreciation, and amortization of 7.9 times. That’s 1 billion pounds ($1.3 billion) more than it was valued at by Jefferies Group LLC, and more than the company’s entire market capitalization before the announcement.

“The sale will go a long way in firming up Centrica’s balance sheet,” Jefferies analyst Ahmed Farman said.

Debt investors were cheered by the U.S. disposal. The cost to protect Centrica’s bonds against default dropped to the lowest since February, as measured by 5-year senior credit-default swaps, according to ICE Data Services.

Centrica is also pausing the sale of its 20{a25bda0f8ab6dac90e68079d6f038584ef6ac53f1f4621de3ad526e35cd6c0d6} stake in the U.K.’s nuclear generation fleet. That’s in addition to the suspension of the sale of its North Sea oil and gas business Spirit Energy.

Turning the company around is “going to be challenging and it’s going to take time but I think we have all the elements we need,” O’Shea said.

(Updates with share price analysis in sixth paragraph)

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