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Recently, a large investor asked us to provide due diligence of a monopoly network company in the United Kingdom to support a M&A transaction.
Electricity North West Limited (ENWL) is a regulated monopoly responsible for electricity distribution across North West England. Serving 5 million customers, with approximately 60,000 km of electricity distribution networks, its operations power cities such as Manchester and Cumbria while advancing the UK’s decarbonisation goals.
Despite the large consumer base and revenue levels of about £580 million in the financial year 2024, ENWL’s acquisition by Iberdrola in 2024 motivated an investor debate over the company’s valuation.
The 2024 transaction was finalised at a valuation of €5 billion (£4.2 billion), including debt, with Iberdrola purchasing an 88% equity stake for €2.5 billion (£2.1 billion). This deal represented a 44% premium over ENWL’s Regulatory Asset Value (RAV) of £2.9 billion. This deal made the UK Iberdrola’s largest market by asset base.
There is a consistent history of electricity network assets in the UK attracting significant premiums above the RAV. Figure 1 shows similar transactions over the past decade.
In this context, Iberdrola's investment does not seem out of range. However, there weresome unique characteristics of ENWL that were central valuation issues.
ENWL has faced persistent challenges with its cost of debt. The regulator, Ofgem highlighted these debt cost problems as far back as 2010. Regulatory reviews by Ofgem, when considering whether to fund ENWL's actual cost of debt, refer to inefficiencies and the risk to consumers. These higher costs have raised concerns about the company’s financeability under existing regulatory frameworks, as highlighted in its RIIO-2 business plan. Moody’s has further criticised the broader utility sector for its reliance on interest rate swaps, a strategy commonly referred to as “kicking the can down the road”. This approach temporarily alleviates financial pressures by deferring costs but leaves companies vulnerable to future economic fluctuations and rising interest rates. For ENWL, such practices have compounded its financing challenges, undermining its long-term financial resilience and heightening scrutiny from both regulators and investors. If these efficiencies carry to the new owner, then this would suggest a lower valuation. However, if the new owner is able to resolve these issues through its broader debt portfolio then there may not be much impact on value.
In its 2019 RIIO-2 business plan, ENWL said its business plan was “not financeable” under Ofgem’s regulatory framework. In particular, it raised concerns about its ability to attract sufficient investment to maintain and improve its infrastructure. This challenge stemmed from ENWL's comparatively high debt costs, which left it at a competitive disadvantage against peers operating with more efficient financial structures. ENWL argued that the regulatory allowance for financing costs did not adequately reflect its higher cost of debt, potentially jeopardising its capacity to meet future capital investment requirements and maintain service reliability. However, Ofgem rejected ENWL’s application for higher debt allowances during the RIIO-2 determinations. The Competition and Markets Authority (CMA) rejected similar requests from another utility company, WWU. These decisions underscored a regulatory principle that companies should bear responsibility for their own financial inefficiencies.
ENWL's Regulatory Financial Performance Report (RFPR) highlights its strong performance in critical areas of its Return on Regulatory Equity (RoRE), including totex efficiency, effective tax management, and strong reliability metrics under the Interruptions Incentive Scheme (IIS). Further, high inflation in recent years has improved ENWL’s debt results, materially dampening a previous weakness, given “an improved debt-funding position when inflation is high and a worse debt-funding position when inflation is low.”.
Geographically, ENWL is located between the two existing ScottishPower networks license areas owned by Iberdrola: central and southern Scotland and Merseyside and North Wales. See map below. This made Iberdrola a natural buyer with potential efficiency synergies from its adjacent franchises. It also opens joint electricity growth options in the transition from fossil fuels to electrification. Arguably ENWL is more valuable to Iberdrola than other buyers.
For reference, the 2007 purchase of ENWL was also a large premium to RAV (1.45) while there was another transaction in 2019 when the Equitix Consortium acquired the business from First State Investments and JP Morgan Asset Management (we understand the premium is confidential for that transaction).
Competing bidders, likely deterred by ENWL's financial inefficiencies, withdrew from the process, leaving the single buyer to finalise the deal.
Other investors, Engie, Caisse de Dépôt et Placement du Québec (CDPQ), and a consortium comprising private equity firm KKR and Dutch pension fund APG chose to exit the transaction, leaving Iberdrola as the lead buyer. Macquarie Asset Management studied it previously and decided not to bid. While ENWL’s recent results are good, a premium of 1.44 appears steep. However, with thesynergies and growth available to Iderdrola and the potential to resolve ENWL’s cost of debtissues, the transaction is not out of range with similar recent transactions.
Value for Iberdrola heavily dependent on synergies and lowering the cost of debt.
Good-value-sell for Equitix and Japan’s Kansai Electric Power Co (Kepco)
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