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Spanish Energy Spin-off Takes Flight
December 14, 2007 04:07 PM
by
findingDulcinea Staff
Spanish utility company Iberdrola launches Iberdrola Renovables, a spin-off of its “green energy” unit; analysts debate the potential for future renewable energy initiatives and the wisdom of spin-offs that are driven by investment fads rather than good business sense.
30-Second Summary
Iberdrola, a Spanish power company, announced the sale of 20 percent of its shares of its wind turbine subsidiary. It is spinning off the unit into an independent corporation called Iberdrola Renovables, which had an initial valuation of €22 billion, or some $32.31 billion.
According to Business Week magazine, Iberdrola is the world’s top producer of wind energy.
Recent investment in “green energy” is the result of both growing social awareness as well as the incentive provided by government subsidies, which, according to the research director at the Barcelona office of consulting firm Emerging Energy, are making the wind energy sector “highly competitive territory.”
Depending on the success of Iberdrola Renovables, other European power producers may follow suit, such as Portugal’s EDP and Accionas, another Spanish firm.
Even Google is entering the green energy sector. At least one writer believes it is doing so with an eye to spinning off the unit in the future.
Financial blogger Brian White writes that if the popular search engine “is grooming several businesses now that end up being spun off in the next few years, we may all soon see just how little this company has grown so far, even in the midst of a $120-plus billion market cap.”
However, companies looking to move into the rapidly expanding wind turbine market should consider the current shortage of components. Danish firm Vestas, which produces more than one-quarter of the world’s turbines, is just one of several such companies to face a production slowdown due to a lack of essential parts.
From a business standpoint, Investopedia contributor Ryan Barnes argues that it is only prudent for companies to take on green energy initiatives, or “they will risk falling behind their competitors in knowledge and shareholder image.”
According to Business Week magazine, Iberdrola is the world’s top producer of wind energy.
Recent investment in “green energy” is the result of both growing social awareness as well as the incentive provided by government subsidies, which, according to the research director at the Barcelona office of consulting firm Emerging Energy, are making the wind energy sector “highly competitive territory.”
Depending on the success of Iberdrola Renovables, other European power producers may follow suit, such as Portugal’s EDP and Accionas, another Spanish firm.
Even Google is entering the green energy sector. At least one writer believes it is doing so with an eye to spinning off the unit in the future.
Financial blogger Brian White writes that if the popular search engine “is grooming several businesses now that end up being spun off in the next few years, we may all soon see just how little this company has grown so far, even in the midst of a $120-plus billion market cap.”
However, companies looking to move into the rapidly expanding wind turbine market should consider the current shortage of components. Danish firm Vestas, which produces more than one-quarter of the world’s turbines, is just one of several such companies to face a production slowdown due to a lack of essential parts.
From a business standpoint, Investopedia contributor Ryan Barnes argues that it is only prudent for companies to take on green energy initiatives, or “they will risk falling behind their competitors in knowledge and shareholder image.”
Headline Links: Spanish utility spins off wind turbine business
Spanish energy company Iberdrola has completed a public offering of 20 percent of shares of its wind turbine unit. The spin-off has some leading energy analysts wondering whether this is the start of a surge in green energy sell-offs. The new company, Iberdrola Renovables, had a high valuation relative to its parent company at €22 billion.
Source: Financial Times (registration required)
Other European utilities providers, such as fellow Spanish company Accionas and Portugal’s EDP, will be watching the trading of the stock to see if they too should spin off their clean-energy holdings. Green energy initiatives currently under consideration by governments around the world are pushing the wind energy segment “into highly competitive territory,” says Keith Hays, research director at the Barcelona office of consultancy firm Emerging Energy.
Source: The Wall Street Journal (registration required)
Background: What is a spin-off?
Financial news network Bloomberg explains the process of “spinning off” new companies from parent corporations in its online glossary of business terms: “A company can create an independent company from an existing part of the company by selling or distributing new shares in the so-called ‘spin-off’.”
Source: Bloomberg
According to Investopedia, a “spin-off is when a subsidiary becomes an independent entity.” First, the parent company distributes stock dividends of its soon-to-be subsidiary to shareholders. The subsidiary gets its own management and board. Generally spin-offs are only created by parent companies running in the black, and they offer both the new and the old firms the opportunity to streamline their management.
Source: Investopedia
Large companies may spin off companies to improve the stature and recognition of a successful brand, writes Chicago-based consultancy Spin-Off Advisors. After the smaller brand is spun off as its own company, its price-to-earnings ratio is significantly higher than that of the original parent corporation, enhancing shareholders’ earnings. Some large companies may create spin-offs to get rid of brands that have become undesirable owing to lawsuits, antitrust issues or other negative publicity. Spin-Off Advisers writes, “Ironically, some of these ‘bad’ spin-offs turn out to be rewarding investments.”
Source: Spin-Off Advisors
In his best-selling book “One Up on Wall Street,” Fidelity Management and Research Vice Chairman Peter Lynch advises readers to consider buying shares in a spin-off if the opportunity arises. “A month or two after the spin-off is completed, you can check to see if there is heavy insider buying among the new officers and directors. This will confirm that they, too, believe in the company’s prospects,” Lynch writes.
Source: findingDulcinea Bookstore
Historical Context: The ups and downs of spin-offs
Business Week writer Pearl Wang writes how Sara Lee divested its luxury accessories label Coach into a separately trading company. From October 2000, when Coach became its own company, until November 2005, the time of the article, “Coach stock [had] soared more than 950 percent since then, vs. the Standard & Poor’s (S&P) index 16 percent drop in the same period.”
Source: Business Week
On March 30, 2007, conglomerate Altria completed its spin-off of Kraft Foods. The parent company’s shares had risen in value by 50 percent since April 2005—more than double the average return of stocks on the Standard and Poor’s 500. According to Lehman Brothers, “Spin-offs from the top 1,500 U.S. stocks by market value beat the stock performance of the S&P 500 by an average of 18 percent from 1990–2005.”
Source: Forbes
Spin-offs had an unfortunate run during the dot-com boom and bust of the late 1990s and early 2000s. Office supply retailer Staples cancelled its plans to spin off its Staples.com unit in March 2001 after it was posting losses and investors were dumping Internet stocks. In an article originally pubished in Entrepreneur magazine, writer Mark Hendricks examines the pitfalls facing new spin-offs. “A struggling spin-off may not be recording sales or write-downs in as conservative a manner as your corporate standards call for,” he writes.
Source: Findarticles.com
Opinion & Analysis: The business pundits
Financial blogger Brian White ponders the possibility of a Google spin-off in the next five years. He quotes Bart Schachter, a partner at Blueprint Ventures, a firm that specializes in helping spin-offs. White argues that because Google has grown so rapidly, in five years the company may be so massive that it may need to break up into more manageable spin-offs. “If the company is grooming several businesses now that end up being spun off in the next few years, we may all soon see just how little this company has grown so far even in the midst of a $120-plus billion market cap,” White writes.
Source: Bloggingstocks
Iberdrola is the world’s top producer of wind power, according to Business Week magazine, and has built and runs wind-turbine farms spanning the globe from the Pacific Northwest to the Greek islands. The company acquired Scottish Power for $23 billion. Part of that deal was the subsequent takeover of Portland, Oregon-based PPM Energy, the United States’ second-largest wind producer. “The United States is huge, flat, windy, and it needs a lot of power,” says Michael McNamara, head of the clean energy research group at financial consultancy Jefferies International.
Source: Business Week
Ryan Barnes, an investment banker and freelance financial writer, writes on business information site Investopedia about how capitalism is wising up to the green energy trend. Once the monetary value of carbon emissions is determined, products and services that consume a large amount of greenhouse gases will become more expensive, thus raising demand for eco-friendly goods. Barnes writes, “When the future inevitably becomes the here and now, companies who arrive late to the game not only risk higher than anticipated costs, they also risk falling behind their competitors in knowledge and shareholder image.”
Source: Investopedia
Related Topics: From green to greenbacks
Search engine Google announced on Dec. 2 that the corporation plans to enter the green energy sector under the name RE<C. The venture’s ultimate goal is to make renewable energy cheaper than coal. Online newsletter Green Energy News reflects on why Google may want to enter the green energy sector. “Google is willing to cause a little disruption within industry, including its own. Getting involved in a disruptive industry—renewable energy—seems a perfect match. If Google can sell energy cheaper than coal, then they would certainly be disruptive,” writes Green Energy News.
Source: Green Energy News
Danish firm Vestas manufactures more than 25 percent of the world’s wind turbines. Although it showed a profit in 2006 thanks to an 8 percent rise in revenues, Vestas is suffering from a shortfall in components from which to build its turbines. The deficit in supply is holding back growth for the wind energy sector as it struggles to meet skyrocketing demand. The United States is a top purchaser of wind energy initiatives, as American firms are looking to take advantage of a tax credit that is set to expire at the end of 2008.
Source: The Economist
Op-ed columnist Anne Applebaum of The Washington Post discusses the fierce opposition to wind power from some environmentalist groups. In “Tilting at Windmills,” she writes that “NIMBYism” (an acronym for “Not In My Backyard”) has been replaced by "BANANAism": "Build Absolutely Nothing Anywhere Near Anything."
Source: The Washington Post
Noted author and professor Stanley Fish attacks the utility of wind power and discusses a community effort to block a wind farm near his summer home in Andes, New York, in his blog for The New York Times. It produced a lively debate, with over 100 comments.
Source: The New York Times
Reference Materials: Winds of change
The Union of Concerned Scientists has a tutorial that explains how wind power works and provides a history of the use of wind power for energy. Wind power held great promise in the United States into the early 1990s, when utility industry deregulation deterred utility companies from funding alternative energy projects, and government subsidies were too small to meet the gap.
Source: Union of Concerned Scientists
Financial information service Hoover’s has a database of companies searchable by both name and stock ticker code. Users can access brief histories of companies and key financial standings.
Source: Hoover’s
Investopedia offers budding investors and anyone who is curious about the financial world a glossary of financial terms and explanations.
Source: Investopedia
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