One might think that acquiring a state-owned natural monopoly is a straightforward transaction, after which the investor would sit back, relax and enjoy the benefits of having a steady cash cow in their investment portfolio. But is that the case with DEDDIE? Is the ostensibly large profitability undoubtedly converted into a sizable internal rate of return (IRR) in the long run?
The Hellenic Energy Distribution Network Operator (DEDDIE) currently employs 5,500 people directly as permanent staff and another approximately 5,000 indirectly through contractors. The company is experiencing the paradox of simultaneously being under- and overstaffed. The majority of its permanent employees were hired during the 1990s and are today fleeing the company as they reach the pension age threshold (2017 headcount 6,500). During the Greek crisis (2009-18) hirings ground to a halt, leaving management with the only option of outsourcing more and more of the core business operations to subcontractors.
Why is the above so important? Because it is at the center of all the challenges ahead. Day-to-day operations, critical outages, yearly network inspections, the digitalization of operations and modernization of the network, the integration of digital technologies and increasing operational efficiency are unfortunately all connected and dependent on a shrinking and aging staff.
Revenue & regulation
The aforementioned challenges lead to the question of the benefits that an investor can reap after acquiring a minority stake in the company.
The monopolistic nature of the company affects the way it obtains revenues. Τhe “allowed” revenue derives from a formula provided by the Regulatory Authority for Energy (RAE). Unfortunately, RAE is a regulator that has also been affected by the crisis. It is an understaffed agency which hasn’t been able to incorporate tools that other regulators utilize across Europe. Electricity network operators in Greece are not forced to comply with bonus-malus schemes and find it very difficult to persuade the regulator to award them premium weighted average cost of capital (WACC) tariffs, even for projects of strategic importance.
The allowed revenue that the company collects through the electricity providers’ bills amounts to €900 million per year. The minimum yearly capital expenditure (CapEx) throughout the last decade has been around €150 million, while annual personnel costs are close to €300 million. A very sizable yearly amount (approximately €280 million) is paid directly to Public Power Corporation (PPC) as rent for the distribution network assets. These assets have remained on the balance sheet of PPC despite the 2012 carve-out and the so-called “functional separation” of the distribution operator.
Up until 2019, the only profitable operation within the PPC Group was distribution, which served as a lifeline for the largest problematic industrial corporation in Greece. Henceforth, it is understandable how decisions that can be influenced (or dictated) by PPC are being made by prioritizing the shareholders’ interests.
DEDDIE as a stand-alone company would have had a regulated asset base of more than €3 billion while these assets would have dragged along €900 million of debt that is linked to network operations. DEDDIE as a vertical distribution system operator (DSO) would have produced approximately €300 million in earnings before interest, taxes, depreciation and amortization (EBITDA) per year since 2012 and would demonstrate a very reasonable debt/equity ratio equal to 3.
The valuation (after the network assets and debt transfer by PPC) will be somewhere above €3 billion, hence 49% will be worth €1.5 billion or more.
But how much of the €300 million per year will actually need to be reinvested so that the company covers the ground lost in the last decade? Would a steep increase in corporate debt deem the company sustainable in the long run? How much of the €300 million EBITDA will actually be converted into net profit, and what would the dividend payout be per year? Can the company increase its RAB and will the WACC remain at 6.8% in the following regulatory period? And, ultimately, is there any hidden value that makes the endeavor worth the risk?
The aforementioned questions require concrete answers, while they should be addressed in conjunction with the following prior actions.
1. Establish Chinese walls with PPC and fortify DEDDIE’s independence;
2. Hire highly skilled personnel by utilizing private sector hiring practices;
3. Retrieve the lost know-how in crucial areas of operation;
4. Ensure a stable and predictable regulatory environment;
5. Increase network investments and complete strategic projects in a timely manner;
6. Secure funding for the aforementioned investments; and
7. Achieve efficiency by transforming operations.
DEDDIE is among the largest distribution companies in the European Union; however, it is far from being among the most efficient. Sizable investments in personnel, infrastructure and digitization are a matter of survival and business continuity for the organization after being severely impacted by the 10-year financial crisis and a financially unstable shareholder.
So, can the company fulfill its mission toward the Greek ecosystem while going through a severe multilevel transformation? And can it achieve a complex set of corporate goals and continue producing sound financial results as well as consistently generate dividends (and IRR), to justify its valuation?
The signatory’s point of view is that there is great potential which comes hand in hand with foreseeable risks. DEDDIE’s hidden value lies with the installment of smart meters (7.5 million low-voltage meters). This project can increase the operator’s RAB by almost 30%, and claim a premium WACC tariff. The smart meters can simultaneously decrease operational expenditure and electricity theft. The latter outcomes would both contribute toward EBITDA, while the whole project could be financed with debt given the low debt/equity ratio, the steady income and expected EBITDA.
All the rest can emerge as the elements of an ambitious transformation plan implemented by a determined management team under the precondition that it enjoys the trust and support of both major shareholders.
Thanassis Misdanitis is the former deputy CEO of DEDDIE.