Fitch: Potential Partnership with A2A is Credit Positive for LGH
The exclusive period of negotiations between the two groups has been extended until 6 November, when a binding offer by A2A is expected. If terms are agreed, the transaction is likely to close in 2Q16.
A2A is the largest Italian multi-utility, mainly active in the Lombardy region (like LGH), with EBITDA of around EUR1.0bn and funds from operations (FFO) net adjusted leverage of 4.2x in 2014. The business mix includes a substantial part of regulated and quasi-regulated activities generating more than half of EBITDA, which is also a consequence of the steep decline of the margins from thermoelectric generation in the past few years.
We believe the most promising areas for joint development, assuming no material opposition from the antitrust, are waste, district heating and gas distribution, in light of the upcoming tenders. Nevertheless, cost synergies from the integration of different companies have historically proven to be quite difficult in the Italian utilities sector, as local companies try to keep strong operational autonomy. Our understanding is that this could be the case also for the A2A/LGH transaction.
Despite the difficult market conditions, LGH's EBITDA was stable at around EUR90m in 2012-2014, but suffered in 1H15 due to negative weather and market conditions and the partial expiry of incentives. Fitch believes that the company has limited headroom for its rating due to its fairly leveraged profile (FFO net adjusted leverage expected above 5.0x in 2015). The envisaged transaction could potentially strengthen LGH's creditworthiness if the company is included in the broader A2A group.
The deal is not expected to trigger the change of control clause (and the subsequent option for LGH bondholders to ask for repayment) due to A2A's ownership structure pursuant to the bond documentation.