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Leonard Hyman & William Tilles

Leonard Hyman & William Tilles

Leonard S. Hyman is an economist and financial analyst specializing in the energy sector. He headed utility equity research at a major brokerage house and…

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Asia’s Warren Buffet Faces Off Against The Utility Industry

Li Ka-shing

One seldom sees a financial news headline so guaranteed not to attract attention. For instance, “Cheung Kong Infrastructure and Cheung Kong Properties buy Ista International GmbH". Other than conveying that investment bankers in Europe and Asia continue to do the Lord's work so to speak, not much information is conveyed. Who would even pay attention to that lead even if one knew the corporate entities involved?

In the interest of public enlightenment, we suggest this instead: “Asia’s Warren Buffet Shifts Focus, Buys German Smart (energy) Meter Firm".  Li Ka-shing, who inauspiciously began his business career selling plastic flowers in Hong Kong, has, like Buffett built and continues to build a worldwide infrastructure conglomerate. It seems to us that with this recent acquisition, the head of one of the largest infrastructure firms in the world is repositioning his business and adding new capabilities.

Two of Mr. Li's principal companies will buy one of Europe’s leading energy and water measurement and management firms, Ista International GmbH. They will pay $5.3 billion (€4.5 billion) for a business with 12 million customers, sales of $995 million and earnings before interest, taxes, depreciation and amortization (EBITDA) of $433 million last year. Ista has over 5,000 employees in 24 countries.

A Hong Kong-based analyst, when queried about the purchase price, said (somewhat noncommittally to our sensitive ears) that it represented a "fair" price and was in line with similar recent transactions. Ista’s owner, investment management firm, CVC Capital had purchased Ista for €3.1 billion in 2013.

A management buyout firm making a hefty 50 percent profit in four years and then moving on excites little interest. It's what they do. But why Mr. Li outbid at least two Canadian pension funds plus their well-heeled financial partners Blackstone and Brookfield for Ista--entities that have been paying generously for secure cash and income generating businesses--is perhaps worth a look. Related: Will Sanctions On Russia Push The EU To US Energy?

It is highly unlikely in our view that Mr. Li attributes his considerable business success to his ability to outbid pension funds for desirable assets or, for his willingness to pay "fair" prices however determined. Perhaps he had something else in mind with this most recent acquisition.

Associated companies under his aegis include major energy, distribution and sales enterprises in Europe (as well as Hong Kong, mainland China, Australia, the UK, Canada and Portugal). The European Union has issued a directive that will put in place energy efficiency requirements by 2020 whose goal is to convert at least 80 percent of Europe's utility meters to so-called "smart meters" that help customers to control their usage of electricity and gas and indirectly their emissions footprints. Ista's business focus, so far, has been on residential apartment buildings and other commercial properties.

However, from a business perspective, the 2020 smart meter adoption in Europe was well known. If like Mr. Buffett, Mr. Li makes long term investments, we should reconsider the meaning behind this significant acquisition.

We would bet that in an increasingly energy conscious world, Mr. Li plans to expand the scope of this business. His formidable business empire already includes ports, real estate, utilities and an oil company. He also owns major holdings in the distribution (but not generation) of energy and a cellular telephone empire in Europe.

While we can read his press releases, we cannot read his mind. But we suspect that Mr. Li looks at energy and water management as businesses with a bright future.

But for franchise owning integrated electric utilities for example, what happens to profitability when their large commercial and industrial customers begin making and selling their own electricity.? Owners of smart meters could become the new middlemen.

We think the next chapter electric utilities involves the gradual and at least partial decentralization of power generation away from the utility monopoly. This suggests that real economic power will devolve to aggregators already on the customer premises, like the metering company. They will help customers maximize the value of their energy assets and probably compete directly with power companies for sales. Related: Sanctions On Venezuela Could Push Oil Into The Mid-$50s

Europe is already leading the way in renewables and it will soon do so in the application of energy efficient advanced metering and control that could make buildings less dependent on the grid. Businesses like Ista could support the formation of microgrids, which might further encourage renewables.

If the Europeans are successful, we should expect that the smart-meter-as-renewables-aggregator model will gain momentum here in the U.S. And that is not good news for conventional electric power generators and the investors who have come to rely on their hefty common stock dividends.

We don't think we're going too far out on a limb in stating that we expect that consumers will not only want cleaner clean energy but also will want to use it as efficiently as possible. As power users gradually transition to becoming power producers as well, there may be zero demand for certain types of base load generation if demand falls or is otherwise shifted. That's an existential threat to the electric power generation industry. Mr. Li has made a substantial bet on a potentially disruptive technology. That is significant news. Mr. Buffett owns the old industry, the legacy utilities and the railroad that carries their coal. Mr. Buffet, it’s your move now.

By Leonard Hyman and Bill Tilles

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