1 Infrastructure in Italy – A Case of Misperception of Risk? 27 March 2014 GESAC HfV Enel Rete Gas Mediterranea delle Acque SEA Mediterranea delle Acque Enel Rete Gas Metroweb
Aug 23, 2014
1
Infrastructure in Italy – A Case of Misperception of Risk?
27 March 2014
GESAC
HfV
Enel Rete Gas
Mediterranea delle Acque
SEA
Mediterranea delle Acque
Enel Rete Gas
Metroweb
2
Introduction to F2i
F2i was created in 2007 by the main Italian public and private financial institutions to facilitate local privatisation and infrastructure spin-offs from the largest Italian groups
F2i has launched its Second Fund, with total Fund target size € 1,2 bn
‒ With tiotal AuM equal to € 2,5 billion, F2i is the largest Italian infrastructure asset manager and one of the most important in Europe
‒ Its portfolio includes some of the major Italian infrastructure (such as the Milan airports, the broadband Milan network, the second largest Italian gas distribution company)
‒ Its Sponsors include: State-owned bank Cassa Depositi e Prestiti; the two largest Italian Banks (Banca Intesa San Paolo and Unicredit); some of the largest Banking Foundations; two Italian Pension Funds; and one major European asset manager (Ardian)
‒ 35 strong management team with decades of experience in infrastructure, led by Vito Gamberale (40 years of experience in the sector)
3
8th largest country in the World in GDP terms*
3d largest economy in the Euro zone in GDP terms*
32% of GDP is exported
60 million inhabitants
4.4 million SMEs, one of the largest European industrial areas
100 industrial districts, producing about 1/3d of Italian manufacturing
90 universities, some of the oldest in the World
47 UNESCO sites of outstanding cultural and historical significance
Why Italy?Italy ranks 3d in the Euro zone in GDP terms
* Source : Prometeia, data as of 2012
4
F2i – Why infrastructure in Italy ?Italy has a solid infrastructure endowment…
300’000 km water distribution networks
252’266 km gas distribution networks
150’000 km sewage networks
146 million airport passengers
41 GW renewable energy generation capacity
24’000 km of rail network (1’370 km high speed)
180’000 km national roads and 6’700 km highways
3 hub ports and 21 first-level commercial ports
* Source : Prometeia, data as of 2012
5
Italy presents various cases in which it excels for its engineering and architectural skills, that allow it to carry out cutting edge works
…with examples of engineering excellence…
High Speed RailIt consists of two lines connecting most of Italy’s major cities (first line connects Turin to Naples, second Turin to Venice). These lines operate at top speeds of over 300 km/h.Several projects are underway to expand the system. Plan include both more domestic connections and new international connections
Mose ProjectThe Mose (Modulo Sperimentale Elettromeccanico) flood protection project is currently being built to protect Venice and its historic city center from high waterMoving flood barriers are being erected at the three inlets of Lido, Malmocco and Chioggia that connect the Venetian Lagoon with the Adriatic SeaThe project is absolutely unique in the world
6- 6 -
Terna – premium/(discount) evolution on RAB
I REGULATORY PERIOD(1)
2004-2007Regulatory wacc: 6.7%
II REGULATORY PERIOD(2)
2008-2011Regulatory wacc : 6.9%
III REGULATORY PERIOD(3) 2012-2015
Regulatory wacc : 7.4%
Financial crisisIntroduction of Robin Hood Tax for companies operating in regulated sectors
4,209 4,369
5,307 5,4024,987
6,243 6,305
5,648
6,693
9.8% 1.9%
10.7%
(7.3%)(3.0%)
8.5% 6.7%
(0.7%)3.7%
2005 2006 2007 2008 2009 2010 2011 2012 2013
Market capitalization - average of the year (€m) Premium/ (discount) on RAB (%)
Note: Premium / (discount) on RAB calculated considering the RAB of the period compared with the implied EV in the average market capitalization of the year, adjusted for the value of non-regulated assets (including non-controlling interests in non regulated Brazilian companies, photovoltaic other non-core minor assets) and their impact on NFP
…with rational regulatory frameworks
7- 7 -
Snam – premium/(discount) evolution on RAB
II REGULATORY PERIOD(1)
DISTRIBUTION 2004-2008: Regulatory wacc : 7.5%TRANSPORT 2005-2009: Regulatory wacc : 6.7%
III REGULATORY PERIOD(2)
DISTRIBUTION 2009-2012: Regulatory wacc 7.6%METERING 2009-2012: Regulatory wacc 8.0%
TRANSPORT 2010-2013: Regulatory wacc 6.4%
Financial crisis and acquisition of Italgas and Stogit
Introduction of Robin Hood Tax for companies operating in regulated sectors
Separation of Snam from ENI
8,606
7,101
8,6558,227
11,105
12,91713,683
11,863 12,308
19.4%
4.3%
20.0%
14.1%
(6.2%)
2.2% 5.9%
(1.7%)2.2%
2005 2006 2007 2008 2009 2010 2011 2012 2013
Market capitalization - average of the year (€m) Premium/ (discount) on RAB (%)
Note: Premium / (discount) on RAB calculated considering the RAB of the period compared with the implied EV in the average market capitalization of the year, adjusted for the value of non-regulated assets (including non-consolidated interests in gas distribution, district heating activities, interest in the UK interconnector and other non-core minor assets) and their impact on NFP
…with rational regulatory frameworks…
8
…and attractive pricing: quality Italian assets are underpriced compared to other European countries
Airports : majority transactions EV/EBITDA multiples
Wheighted average global
transactions:14.4x
Wheighted average Italian transactions:
9.9x
Airports : minority transactions EV/EBITDA multiples
Gas : majority transactions EV/EBITDA multiples
Wheighted average global transactions:
12.7x Wheighted average Italian transactions:
8.9x
Water : all transactions EV/EBITDA multiples
Wheighted average global transactions:
11.0x
Wheighted average Italian
transactions:8.2x
Wheighted average global
transactions:9.9x
Wheighted average Italian transactions:
8.9x
9
Asset Premium vs. Gov. Bond 10Y
MDA Water 9,3%
SEA II Airport 10,0%
TRM Waste-to-Energy 8,0%
SIA Technology Infrast. 9,9%
ERG II Gas Distr. 8,8%
Average 9,2%
Sector
Risk premium between government bonds and infra investments
─ F2i’s IRR expectations show an average premium (~9%) to Italian Government Bonds 10Y higher than UK and Germany (~ 7- 8%).
Asset Country Sector
NWG UK Water
Thames UK Water
Stansted UK Airport
SESW UK Water
Phoenix UK Gas Distr.
Average UK
OGE GER Gas Transp.
6.8%
7.1%
7.9%
7.3%
8.6%
Premium vs. Gov. Bond 10Y
8.0%
9.2%
0%
3%
6%
9%
12%
15%
ITA Gov. Bond 10Y
SIA
ERG II
SEA II
TRM
Infra investments return vs. Government Bonds in Italy... … and in Europe
Roumored IRRs
0%
3%
6%
9%
12%
15%
UK Gov. Bond 10Y GER Gov. Bond 10Y
Oct. 2011 Oct. 2012 Oct. 2013
StanstedAirport
UK
Phoenix Gas Distr.
UKOGEGas Transp.
GER
NWGWater
UKThamesWater
UKSESWWater
UK
Oct. 2011 Oct. 2012 Oct. 2013
F2i Fund I and Fund II Investments (in portfolio) and expected IRR (1).
F2i Fund II Investments (ERG II concluded and SIA expected to be formally closed by April 2014) and expected IRR (2).
(1) Expected IRRs represent the expected return as at 31 December 2012.
(2) Expected IRRs represent the expected return at signing.
MDA
10
A comparison in the water sector
─ The spread between the expected IRR for F2i in the water sector in Italy and the one expected in the UK market, is justified both from the gap in the risk free rate (i.e. country risk premium) and the specific asset risk.
4,5%2,2%
9,3%
7,8%
0,0%
2,0%
4,0%
6,0%
8,0%
10,0%
12,0%
14,0%
16,0%
Expected IRR - F2i Water Expected IRR - UK Water
13,8%
10,0%
Spread between Italian and UK Government Bonds of approx. 230 bps
Spread relating to the different risk between Italian and UK water business of approx. 150 bps
11
Market dislocations, financial constraints, regulatory changes, liberalizations and privatizations are fueling an important flow of quality opportunities in Italy, particularly in these sectors :
Italian infrastructure includes sectors of particular attractiveness
• Well established RAB-base regulation allowing strong margins and cash generation• Significant opportunities for consolidation among 250+ gas distributors
• Asset fragmentation• Ample potential in revenue and cost synergies through coordinated management of several facilities
• Focused roll-out of ultrabroadband infrastructure in selected urban centers• Substantial opportunities in mobile telephony and broadcasting towers, due to divestments by incumbents
• Strong trend to develop more waste processing facilities, green and brownfield opportunities• Highly fragmented market, with the first nine operators capturing only 9% total market share
Gas
Toll roads
Telecoms
Waste
Airports
• Opportunity to create a large operator in a core infrastructure sector by participating in selected privatizations
• Italian water network is obsolete, with average distribution losses of 37% and insufficient coverage• Sector is highly fragmented, with thousands of local operators and only few national playersWater
• Disposal opportunities from over-leveraged utilities in a favorably regulated sector• Acquisition opportunities in renewable energy generation due to sector fragmentation and sub-optimal operator scalePower
12
Enel Rete Gas
GESAC
Enel Rete Gas
SEA
13
Mediterranea delle Acque
HfV
Metroweb
Mediterranea delle Acque
14
Acquisition of 100% stake in Enel Rete GasCo-investor: AXA Private Equity (28%)Date: May 2009 EV €1’447 millionDate: December 2013 EV €2’450 millionType: brownfieldSecond largest gas distributor in Italy
Enel Rete Gas
Market share (%) 11
Clients (million) 2.23
RAB (€ million) 1’565
Turnover (€ million) 396
EBITDA (€ million) 230
Pipe network (km) 32’946
Municipalities 1’213
Acquisition of 100% stake in E.On ReteCo-investor: AXA Private Equity (25%)Date: April 2011EV €255 millionType: brownfieldSeventh largest gas distributor in Italy
Enel Rete Gas + E.ON Rete ∆
Market share (%) 13 +18%
Clients (million) 2.79 +25%
RAB (€ million) 1’864 +19%
Turnover (€ million) 528 +33%
EBITDA (€ million) 274 +19%
Pipe network (km) 41’539 +26%
Municipalities 1’479 +22%
Acquisition of 100% stake in G6 Rete GasCo-investor: AXA Private Equity (25%)Date: September 2011 EV €742 millionType: brownfieldSixth largest gas distributor in Italy
Enel Rete Gas + E.ON Rete + G6 Rete Gas ∆
Market share (%) 17 +55%
Clients (million) 3.81 +71%
RAB (€ million) 2’588 +65%
Turnover (€ million) 689 +74%
EBITDA (€ million) 360 +56%
Pipe network (km) 57’237 +74%
Municipalities 1’962 +62%
F2i – Case studies – Fund I and & II investmentEnel Rete Gas – consolidation into Italy’s second largest gas distributor
15
Investment rationale
• Second largest gas distributor in Italy, with 11% market share in 2009• Predictable revenue streams from regulated activities• Strong cash generation• Ideal platform to lead consolidation strategy in Italian gas distribution sector, in
order to reach similar industry structure as in other European countries
Investment overview
• Description: Enel Rete Gas is the second largest gas distributor in Italy
• Deal source: Tender process
• ERG investment dates: September 2009 (€279m for 63.8%) and December 2013 (€50.6m for 8.1%); F2i total ownership is 72%
• Co-investor: Axa Private Equity (28% ownership)
• Add-on investment dates: E.ON Rete 04/2011 (€71m for 100%); G6 Rete Gas 09/2011 (€68m for 100%)
Value creation
Actions•Led two major acquisitions to build a group with 17% market share
• E.ON Rete : seventh largest• G6 Rete gas : sixth largest
•Integrate and rationalize group• Integrate management, structure roles & responsibilities• Internalize specific services previously out-sourced to Enel• Rationalize field operations• Harmonize processes and use of best practices• Integrate and upgrade IT systems
•Market leader in terms of • Revenue per client• Technical quality (AEEG incentives)• Network inspection• Average time for rapid intervention• Non-standard services
•Lead innovation, service quality and safety
Results above expectations•Synergies over 2x higher as initially forecast and significant cost reduction•Consolidated group results are above budget in turnover, EBITDA and EBIT in 2012•€314.5m distributed in total to shareholders by ERG in 2010-2013•Net financial position substantially improved
Key Statistics 2009 2010 2011 2012 2013e
Revenue (€m) 318 361 629 689 685
EBITDA (€m) 161 189 323 360 370
Margin (%) 51% 52% 51% 52% 54%
Dividend strategy and exit
• Optimize dividend flows• Exit through IPO or sale to strategic buyer
10 Largest LBOs in Europe 2009 (Bloomberg)
F2i – Case studies – Fund I and & II investmentEnel Rete Gas – consolidation into Italy’s second largest gas distributor
16
F2i – Case studiesF2i Airports Network – 37% of total Italian passengers traffic
Acquisition of 70% stake in GesacDate: 12.2010 + 02.2011 EV €225 –164 million (weighted average € 221 million)Airport: NaplesType: Brownfield7th largest airport by passengers
GESAC
Market share (%) 3.9
Passenger (million) 5.8
Turnover (€ million) 71
EBITDA (€ million) 22.9
EBITDA Margin 32%
Acquisition of 44.3% of SEA in two stepsDate: 12.2011 + 12.2012 EV €1.68 - 1.41 billionAirports: Milan Malpensa & Linate, (Bergamo indirectly)
Type: Brownfield2nd largest hub by passengers
SEA*
Market share (%) 19
Passengers (million) 28
Turnover (€ million) 621
EBITDA (€ million) 141.5
EBITDA Margin (%) 23%
Acquisition of 50.79% stake in SagatDate: December 2012 EV €117 millionAirports: Turin, (Bologna indirectly) Type: Brownfield12th airport by passengers
SAGAT*
Market share (%) 2.4
Clients (million) 3.5
Turnover (€ million) 63
EBITDA (€ million) 14
EBITDA Margin (%) 22%
MXPBER
LIN
NAPNAP
Majority stake
Qualified minority stake
Minority stake
* Data excludes indirect interests in SACBO and SAB
Majority stake
Qualified minority stake
Minority stake
Majority stake
Qualified minority stake
Minority stake
MXPBERLIN
BOL
TOR
NAP
17
F2i – Case studies – Fund I and & II investmentSEA Airports – Milano Malpensa and Milano Linate
Investment rationale• Italy is one of the largest European airport markets, featuring strong growth
(2000-2012 CAGR +4%)
• Combining different airport infrastructures to create a network sharing a common value creation strategy
• SEA manages the 2nd largest passengers hub in Italy and 9th in Europe and the leading cargo traffic airport (60% of total annual cargo volume in Italy)
• The combined assets of F2i’s airport network create a network of 54 million passengers in 2012 representing 37% of the total Italian passenger traffic
• Attractive acquisition multiple (8.2x for SEA II) vs. International average(13.9x)
Investment overview
• Description: SEA is the second largest airport hub in Italy• Ownership: 8.6% of SEA held by Fund II (44.3% of SEA by Fund I &
II)• Indirect ownership: 31% of SACBO (held by SEA)• Deal Source: Proprietary• F2i airport investments :
Fund I: 12.2010 €81 million GESAC EV €221 million Fund I: 12.2011 €385 million
SEA (I) EV €1.68 billion Fund I:12.2012 €60 million SEA (II) EV €1.41
billion Fund II: 12.2012 €87 millionSEA (II) EV €1.41 billion
Fund I: 12.2012 €63.5 million SAGAT EV €117 million
Value creation
Actions•Take advantage of the highly fragmented Italian airport sector by opportunistically acquiring strategic airports
•Create a network of efficient and profitable airports that can be managed pursuant to a common value creation strategy and leveraging economies of scale
•F2i already invested in 3 leading airports• GESAC – Naples airport • SEA – Milan Malpensa & Linate airports + Bergamo indirectly• SAGAT – Turin + Florence and Bologna indirectly
•F2i created an Airport Advisory Board to:• Share best industry practices and a common strategy• Improve revenue management through coordination of major
customers and retailers• Generate commercial and operational synergies• Enhance negotiating position with main counterparties, in
particular with low-cost carriers• Optimize costs, through synergies in procurement• Benchmark quality and costs across airports• Improve external relations management, in particular vis-à-
vis Italian regulatory authorities
•Participate in already announced airport privatizations including: Palermo, Verona, Cagliari, Genoa, Bologna, Apulia airport system and the remaining public stake in the Milan airports
Key Statistics (*) 2011 2012 2013e
Revenue (€m) 596 621 642
EBITDA (€m) 134 141 163
Margin (%)*Does not include minority interests in Bergamo, Florence & Bologna airports
22.5% 22.8% 25.0%
Dividend strategy and exit
• Optimize dividend flows• Exit through IPO or sale to strategic buyer
18
Infracis
Mediterranea delle Acque
19
TRM
SEA
20
The key to manage a complex market: pros of Country - focus
• In-depth knowledge of the country and its legal and regulatory system
• Proximity with all major constituencies
• Government
• Local authorities
• Regulators
• Unions
• Direct access to deals
• Better sourcing
• Deeper due diligence
• Closer negotiation
• Ability to pursue buy and build strategy
• Privileged access to local financing
• Asset management benefitting from geographical proximity
• Best local management talent