Energy investments continuing to flow via Madrid

Despite the turmoil of the past year Spain's energy sector continues to see investment,
while many operators are also now looking to accelerate their international expansion

The events of the past 18 months
may have brought a virtual stop to
mainstream M&A and private equity
activity in Spain, but an industrial
sector that continues to be an
exception – with continuing merger,
divestment and M&A activity – is
Spain's renewable energy sector,
says Federico Roig, an M&A partner
with Cuatrecasas, Gonçalves Pereira
in Madrid.

'Spain remains on track to
achieve the European Union's goal of
generating 20% of its electricity
needs from renewable sources in
2020, and consequently the
photovoltaic (PV), thermo solar and
wind sectors continue to see a lot of
investor interest.'

There may have been significant
tariff changes, particularly relating
to PV and thermo solar energy
production, over recent months as
the government sought to better
manage the flow of development
in the sector, but interest
nonetheless continues, agrees
Luis Pérez de Ayala, a regulatory
partner with Cuatrecasas,
Gonçalves Pereira also in
Madrid.
'The tariff changes have
brought greater time, price and
regulatory pressure on operators
– in the PV sector prices are 35%
down on the previous regime – but
still all the quotas are full, and
there is a long queue of those willing
to fill any gaps.'

The new regime remains
sufficiently attractive to draw new
investment, albeit potential investors
must be aware of the time scales that
surround new projects, says Roig.
Many projects begin but relatively
few finish.

'New developments have to be up
and running within a year of gaining
tariff approval and this can bring
both finance and timing issues.
There may be only a very short
window in which to complete
purchases of projects under
development and still make the 12
month construction deadline.'

Deals have therefore to be
carefully managed with much more
control of issues such as due
diligence and in negotiating the
terms, conditions and warranties. A
recurring issue also is the
professionalism of some of the
smaller promoters and developers in
the sector.

'Many are reluctant to deal on an
exclusive basis with a prospective
purchaser, no matter what their track
record, and so there can be concerns
whether a deal will actually complete
until almost up to the deadline,' adds
Luis Pérez de Ayala.

Nonetheless transactions are
being done. One of the aims of the
new tariff regime was for operators
to benefit from economies of scale
and to encourage more capable
players to the sector. Consequently
they report significant interest from
both infrastructure funds and
existing operators to acquire
portfolios of projects under
development and in operation.

'It is now unusual to see projects
change hands several times as the
time scales involved are just too
tight, but purchasers are overcoming
issues around debt by initially self
financing acquisitions of greenfield
projects through equity deals and
refinancing post-closing, if and
when debt availability is secured'
says Roig.

The financial and regulatory
situation in Spain is also now
accelerating the international
expansion of many of the sector's
larger players, they say.

'Companies that had become used
to high revenues – thanks to the
previous tariff regimes – are now
looking to new markets to maintain
revenue flows. Many are also now
larger, more capable and much more
ambitious in their outlook,' says Roig.

The result is that renewable
companies are looking to Eastern
Europe, Italy and Greece for new
opportunities, as well as to northern
Africa and increasingly the US.

'There is a difference in scale
among the projects being undertaken
and the types of companies
undertaking them – Italy and Greece
remain developing markets, while in
contrast, huge investments are now
being made across north Africa and
the US,' adds Pérez de Ayala.

Indicative of the scale of
investments being made in the energy
field is the gas pipeline now
connecting Spain and Algeria
(Medgaz), which is expected to come
on stream in 2010. 'The investments
being made in many of these places
are very significant, energy companies
are looking at the long-term and these
are markets in which Spanish
companies wish to stay,' says Roig.