Several mid-cap infrastructure funds are considering bidding for the UK district heating business of Equans, likely to be the largest of several ongoing divestments by the Bouygues-owned energy services group.
Equans, which last year appointed Perella Weinberg Partners to advise on the sale, has issued information memorandums and requested non-binding offers by 13 April, said several sources familiar with the matter.
Sustainable Development Capital (SDCL) is planning a bid for the assets, according to sources. The firm mostly invests through the London-listed SDCL Energy Efficiency Income (SEIT) fund, which in 2021 bought US district energy firm RED-Rochester from Stonepeak.
Dutch fund manager DIF Capital Partners, which is already active in district heating in Scandinavia through Loimua, is also preparing an offer, two sources added.
Other UK managers are also eyeing possible bids, according to sources, including Ancala Partners, whose portfolio company Leep Utilities operates heating networks, and Infracapital, which owns network operator Last Mile Infrastructure in the UK and heating firm Eteck in the Netherlands, and previously owned Adven in Scandinavia.
One source added that Adven itself, which is now owned by JP Morgan Asset Management, is evaluating a bid for Equans’ assets to expand into the UK market.
Asper Investment Management, which recently raised GBP 220m of capital for a UK district heating fund, is also weighing a bid, sources added.
The long list of interested bidders also includes Antin Infrastructure, which sources said could bid for Equans’ assets through its mid-cap fund, which raised EUR 2.2bn in 2021, or via French district heating company Idex.
Several other mid-cap investors are mulling participating in the auction, although it is still unclear if they will proceed with an offer, including KKR Infrastructure-owned John Laing; Basalt Infrastructure Partners, which last year sold its US heating provider DB Energy Assets to Vauban Infrastructure Partners; and Igneo Infrastructure Partners, which is in the process of selling its French district heating company Coriance.
The heating business on the block includes district heating network concessions in London’s Olympic Park and Battersea, as well as in cities such as Southampton, Newcastle, Coventry, Birmingham and Leicester.
Sources said the assets generated about GBP 20m of EBITDA last year and could fetch valuations of around GBP 400m.
The business is seen as a good opportunity to invest in a growing market, given the low level of district heating penetration in the UK and a push by the government to change that.
Only about 2% of the UK’s heating demand is currently met by district heating, with about 14,000 local networks serving 500,000 consumers. The government wants to expand this to as much as 18% by 2050 and estimates this represents an investment opportunity of between GBP 13bn and GBP 22bn.
Despite the growth opportunities, other factors could dampen enthusiasm and put a brake on valuations, with several sources saying it is unlikely Equans’ business will be able to command EBITDA multiples of 25x or more seen in Scandinavia.
The sources pointed to the relatively low duration of some of the concessions; the high capex requirements to cut carbon emissions of the existing concessions, and their lower profitability compared to other European markets, with EBITDA margins in the 20% area.
UK heating networks are currently unregulated, but the government is due to introduce new regulation from 2024, putting Ofgem in charge of the sector and introducing pricing control.
Infrastructure funds are increasingly buying district heating assets as an attractive energy transition investment opportunity, given the move from gas-fired supply towards renewable sources such as waste heat, geothermal, large-scale heat pumps.
Besides the sale of France’s Coriance, which is tipped to fetch over EUR 2bn, another major deal currently ongoing is Vattenfall’s sale of its Berlin heating operations, which has drawn interest from infrastructure heavyweights.
In parallel to the UK district heating assets, Equans is also selling its Dutch geothermal heat operations, which is yet to generate substantial turnover, and is targeting EUR 12m of revenues, and its Dutch Aquifer Thermal Energy Storage (ATES) business, which extracts heat from groundwater and generated EUR 3.4m of EBITDA in 2022.
Equans, which was bought by Bouygues last year, is also selling its UK and Dutch electric vehicle (EV) charging businesses.
Adven, Ancala, Asper, Basalt, DIF, Igneo, Infracapital and John Laing declined to comment. Equans, Antin and SDCL did not respond to requests for comment.
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