BoA Merrill, Deutsche Bank and UBS mandated for TRUenergy IPO

TRUenergy, the Australian unit of Hong Kong-listed power producer CLP Holdings, has mandated Bank of America Merrill Lynch, Deutsche Bank and UBS to work on an initial public offering and listing on the Australian Securities Exchange, sources said yesterday.

The deal, which is expected to come before the end of this year, could raise A$2 billion to A$3 billion ($1.97 billion to $2.95 billion), according to various sources and media reports.

Although CLP has yet to formally come out and say that it will go ahead and float the Australian unit, which is currently 100% owned, investment banks have been eagerly competing for the business. A role on the IPO is coveted because of the dearth of major listings in Australia in the past couple of years and because the deal is expected to result in decent fees and league table credit.

At the talked-about size, this would be the largest IPO in Australia since November 2010 when railway company QR National raised $4 billion, according to Dealogic data.

Almost a dozen banks are said to have pitched for the business in early May, but since then the company and its financial adviser Rothschild had narrowed the field down to a short-list of five. Aside from the three mandated banks, J.P. Morgan and Morgan Stanley also made the short-list.

Local media expressed some surprise yesterday that neither J.P. Morgan nor Morgan Stanley were given roles, since J.P. Morgan’s non-executive chairman for Australia and New Zealand, Roderick Eddington, sits on the CLP board and Morgan Stanley was an adviser to TRUenergy on its $2 billion acquisition last year of EnergyAustralia’s retail assets and Delta West Gentrader.

As always, there were no reasons given for the decisions, but UBS’s scale and its position as a top arranger of ECM deals in Australia in recent years would have counted in its favour. BoA Merrill was a bookrunner on the QR National deal (together with UBS and three other banks), where Rothschild was also a financial adviser.

TRUenergy is the third-biggest privately owned energy business in Australia with 2,103 megawatts of wholly owned generating assets and about 2.8 million customers. Its generating assets include the 1,480MW Yallourn coal-fired power plant that supplies 22% of the energy needs in the state of Victoria, as well as gas-fired plants and wind farms. The acquisitions last year also gave it access to a further 3,366MW of power through off-take contracts.

CLP first got involved in the Australian market in 1999 and describes TRUenergy as a “major asset”. As a result, it will only do an IPO if it is satisfied that it will create value for CLP’s shareholders, CEO Andrew Brandler was quoted as saying in the 2011 annual report.

However, Brandler also noted that a separate listing would allow CLP to get a return on the capital it has invested in Australia and would provide TRUenergy with its own platform to raise capital for future investments. It would also strengthen the Australian identity of the business and allow the TRUenergy board to focus single-mindedly on its own business, rather than having to compete for resources and capital with the CLP group as a whole.

The ability for TRUenergy to raise capital on its own would enhance CLP’s financial flexibility and might help preserve its credit ratings, which came under pressure after the firm took on debt to finance the acquisitions of EnergyAustralia and Delta West Gentrader last year.

CLP may use the money from the IPO to pursue further acquisitions and investments in markets like India and Southeast Asia, analysts say. Together with China Southern Power Grid, the firm is also in talks to buy ExxonMobil’s 60% stake in Capco, which owns three power plants in Hong Kong with a total capacity of 6,908MW. CLP already owns 40% of Capco.

Sources say CLP may spin off between 25% and 49% of the Australian business, with the final size likely to depend on the market conditions at the time of the deal. According to a Citi report, TRUenergy had total assets of A$9.3 billion at the end of last year and A$2.4 billion of debt, which implies a rough equity value of about A$6.9 billion. However, Citi analyst Pierre Lau noted that it is not clear whether the business has other liabilities that are not known.

Last year, TRUenergy reported operating earnings of HK$2.9 billion ($22.6 billion), which was up from HK$1.3 billion in 2010 and accounted for about 22% of CLP’s total operating profit. The gain was primarily driven by the recent acquisitions as well as retail tariff increases during the year.

A total of $1.07 billion was raised from IPOs in Australia last year, which was down from $7.4 billion in 2010. Year to date, there have been only $227 million worth of new listings, split on 20 deals.