Why is the State going to nationalize EDF?
On Wednesday, July 6, the Prime Minister Elisabeth Borne announced that the company EDF (Electricité de France) will be nationalized. And consequently, that the State will become the unique shareholder of the company. This operation, although not unanimously approved, is an excellent example of a takeover bid.
Brief summary of the history of EDF
At the end of the Second World War, the French electricity and gas markets were considered to have great potential. Steadily increasing since the beginning of the century, the financial forecasts for these two industries were more than positive. Although largely dominated by two companies, L'Union d'Electricité and Energie Industrielle, the market is also made up of several smaller companies specialized in the production and sale of gas and electricity.
Marked by the war, in 1945 France had to be rebuilt. Gas and electricity are considered as the driving forces and essential elements for the reconstruction of France. The CNR (National Council of the Resistance), which was at the head of the State, decided to nationalize all the means of electricity and gas production, in order to put them at the service of the State. Supported by the Gaullists and the Communists, who considered this project to be in line with the theory of the planned economy, EDF was founded on April 8, 1946 by the Communist Marcel Paul.
The company quickly became profitable and enjoyed a good reputation. It did not undergo any major changes until the 1990s. The corporate then underwent many changes, mainly due to its listing on the stock exchange, the implementation of new European regulations on electricity, and the purchase of multiple companies abroad.
What is EDF's current financial performance?
In 2021, EDF's sales will be 84.5 billion euros, and net current income will be 4.7 billion euros. The group's debt remains high, however. In 2021 it will be €43 billion, higher than in 2020, when it was €42.3 billion.
The 2022 forecasts are not particularly optimistic. An increase in debt, a 10% decrease in the production of the nuclear fleet, and a 5 billion euro decrease in EBITDA due to the deterioration of the nuclear reactors is expected. It should also be mentioned that an asset disposal plan is still underway. This plan is estimated at 3 billion euros. The tariff shield forces EDF to increase its supply costs without being able to increase its revenues, implying a significant loss of money.
As for the share price, it has not seen a significant increase since 2016. It has even lost more than 60% of its value since 2008. EDF is therefore experiencing a period of financial difficulty, which is one of the reasons why the State wants to nationalize EDF.
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Why does the State want to nationalize EDF?
If the poor financial health of the company is one reason, it is far from being the only one. The war in Ukraine has reminded us that energy sovereignty is a major issue. Energy production is a major geopolitical lever. This is all the more true since EDF is a company with a significant weight in Europe, particularly in France, in Italy and in the United Kingdom, where it has very important subsidiaries. Nationalization therefore allows the State to strengthen France's energy independence.
The nationalization of EDF is also a way for the State to have a greater impact on the French nuclear park. This will allow it to make the management of the park more fluid and simpler. But also to be able to invest massively in order to implement the improvements necessary to upgrade the nuclear power plants.
How is the process of nationalizing EDF proceeding?
Formerly owner of 84% of the company's capital, the state wishes to acquire the remaining 16% in order to become the unique shareholder of the company, and therefore the only one able to take strategic decisions.
In order to put in place the acquisition of these 16%, the government has announced to propose in September an offer of 12 euros per share. That is a capital gain of 4.16 euros per share, based on the share price of July 6, which was 4.16 euros before the announcement of Elisabeth Borne. The cost of the operation is estimated at about 9.7 billion euros for the French government.
Offering a price above the value of the share price is a common method used during takeovers. The objective is to push shareholders to sell their shares. This is not always easy, especially when the shareholders consider that the proposed amounts are not significant enough to be sold.
Before this takeover is possible, it must be validated by several authorities, in particular by the financial markets authority, as well as by the competition authority.
To sum up
EDF, the flagship of the French economy, is currently going through a difficult period. With not very encouraging financial results and pessimistic forecasts, the company has seen better days. In order to get out of this bad situation, but also to assert the geopolitical position of France, and to renew its nuclear park, the State wishes to nationalize EDF. This 9.7 billion euro operation, which is still in its infancy, announces profound changes for the company.
