MET Group scores energy infrastructure acquisition
The transaction of MET Group’s acquisition of Tigáz, Hungary’s largest natural gas distributor, has officially closed. What makes a company that has fundamentally made important gains – already at a European level – in energy trading decide to engage in such a large-scale asset purchase deal?
MET Group signed a share purchase agreement with Italian ENI back in December 2017 about its 98.99 percent stake in Tigáz Zrt.: this transaction has now been closed (as of 21 June). Tigáz-DSO Földgázelosztó Kft., 100% owned by Tigáz Zrt., is mainly responsible for the distribution of natural gas in North Hungary and the Northern region of Hungary’s Great Plain.
The choice of a transaction of such a scale is never made on a whim – the deal discussed herein was also settled on as a result of several natural gas market impact evaluations, conducted three to four years ago. The acquisition of Tigáz is an important milestone in a series of steps affording MET’s management the addition of a new strategic complement to the company group’s existing game plan.
Winds of Change Begin to Blow
“Recent years have seen the emerging trend of capital intensity becoming an important factor again, which was not typical of the 2000s – the beginning of the company's operations. The new direction will trigger consolidation on the markets. What does this mean in practice? While the market entry threshold was low, a large number of electricity and gas traders sprung up across Europe, with countless traders starting to deal in wholesale or retail, or even both. However, we now see the number of these companies dropping considerably,” explained Balázs Gábor Lehőcz, the current CEO of MET Power and the newly appointed CEO of Tigáz Zrt.
The purely commercially driven golden age might be ended by the increasing competition, generated by the actors themselves, starting to fight for customers (whether industrial or residential), which has caused the margins to fall, and the cheap financing of recent years, owing to the low interest rate environment. Although this state is still existing, it is increasingly uncertain that it will persist in the future as well.
"In energy trading, per unit margins typically never were really high, but they have shrunk by today to such an extent that the running of many small companies has become impossible. This is essentially a trend of a European scale. As the organising principle of the ongoing consolidation is that only those who have a calculable and predictable income-generating capacity in both the medium and the long-term can be sure of their own survival,” Lehőcz said.
Even the largest transform
“All large companies, typically dealing in commodities – like Glencore, Trafigura or Mercuria –, started years ago to move away from their assetless trading positions towards a corporate structure that lays a growing emphasis on physical assets. This also means that they seek to exploit asset-based trading positions rather than classical speculative trading. In a manner similar to this, but custom-tailored to our company, we also seek to break new ground: initially through judicious steps, focusing on the Central European market,” explained the expert.
Long-term viability, which is closely related to a predictable EBITDA-generating capability, is largely determined by long-term financing options. As a result, the existence of a large customer network and a specific power generation and supply infrastructure, which provide a solid background for a trader, is increasingly valued.
“For a company MET Group’s size, the challenges of the present cause less trouble. The strategic direction of the future and the soundness of its foundations are much more important,” the CEO explained.
A three-legged chair is already stable
The first item of MET’s asset portfolio was the Dunamenti Power Plant, acquired by the company in 2014. The entity, which was then close to bankruptcy, has turned by now into a successful enterprise. The next pillar was renewable business: the company is building a solar power plant in Hungary and is planning renewable energy production investments elsewhere as well.
“This asset strategy needed a third leg. We decided for that third leg to be energy infrastructure: firstly, one that is close to our core business activity, i.e. gas trading. This is how we chose Tigáz. This company, as an energy infrastructure, is such a stable portfolio element that it will hopefully ensure a calculable and predictable future from the very first day; this is an important condition both for the company group and the banks financing us,” Balázs Gábor Lehőcz emphasised.
Deceptive image regarding Tigáz
Energy wholesale is typically the business of little but frequent money. For example, the turnover of MET Group was EUR 7.6 billion last year (around HUF 2500 billion), but these huge figures have a fundamentally moderately low margin content in them, typical of European markets.
For an asset, however, the situation is different. Turnover at Tigáz is lower (providing only a fragment of the turnover of the MET Group), but the profitability of assets may be higher than that in trading or wholesale these days. Thereby, in terms of income-generating capability, Tigáz can have a significant role within the company group.
“Tigáz used to be made up of three business lines: a regulated market trading business, a competitive market trading business and the distribution network itself. The former now belongs to Nemzeti Közművek (National Utilities), while the latter went to Elmű-Émász, and we acquired the distribution network. What we have purchased is the physical asset and the related technological activity. In Tigáz’s area of operation, residential consumers outnumber industrials, but we are not the supplier to these customers. However, from a technical aspect, we are in charge of operating the pipeline network and providing the gas supply,” summarised the CEO of Tigáz.
The company’s workforce is multiplied
With the arrival of 1200 colleagues of Tigáz, MET Group already has more than 1700 employees. Previously, MET mostly employed knowledge workers, but the company has also had a smaller blue-collar crew for already four years.
“The Dunamenti Power Plant is a success story from an HR point of view as well. I was impressed with the people not only capable of doing great things both inside and outside of their offices. I am especially glad that it is a company whose operation involves much more than producing paperwork and contracts. Thanks to its highly skilled personnel, it also operates tangible equipment that creates value. I also find it extremely important for a technical company, like Tigáz, to observe the highest standards regarding work safety and health protection. In this field, ENI set a very good example for us,” said Balázs Gábor Lehőcz.
The future has three major challenges in store for the industry. 1. The transformation of the current regulatory structure, urged by the EU as well, the guidelines of which have not been worked out yet, as well as the Hungarian legislative harmonisation keep the industry waiting. 2. The question is to what extent energy efficiency will affect the consumption of natural gas in Hungary, and what industrial investments can be used to offset the expected loss of volume in the future. 3. It is difficult for all gas and power distribution companies to find employees, and it is true for nearly all companies of this type that the company’s age pyramid is relatively tall.
Physical work, especially this field of the energy sector, has become less attractive in the labour market, and has not been appealing at all to young people over the last ten years. MET Group needs to work on meeting the above three challenges, and on making these jobs more interesting to the younger generations as well.