Harmony Energy Income Trust (HEIT) has agreed terms for a recommended cash offer from Drax Bidco, a wholly owned subsidiary of Drax Group Plc (DRX), which values HEIT at approximately £199.9m. The offer will be implemented by way of a scheme of arrangement and provides shareholders with 88p per share in cash.
The offer represents a premium of:
- 5% to the possible 84p offer from Foresight announced on 17 March;
- 35% to HEIT’s share price of 65.2p on 14 March (pre-Foresight announcement);
- 11% to the 79.2p closing price on 24 March; and
- 84% to the 47.8p price on 29 May 2024, ahead of HEIT’s asset sale announcement.
In total, irrevocable undertakings representing 19.6% of HEIT’s share capital have been received in support of the offer, including from the HEIT board.
Strategic rationale
Drax sees HEIT’s operational battery energy storage system (BESS) assets – totalling 790.8 MWh across eight two-hour projects – as a natural fit with its existing FlexGen platform. The acquisition is expected to:
- Enhance Drax’s ability to profit from daily power price spreads and volatility;
- Expand its ancillary services offering;
- Complement Drax’s 24/7 energy trading capabilities.
Drax expects returns on the acquisition to exceed its target weighted average cost of capital and sees HEIT as a high-quality, cash-generative portfolio with future potential for in-sourcing optimisation.
Board recommendation
The HEIT board has unanimously recommended the offer, with financial adviser Panmure Liberum confirming the terms are fair and reasonable. The directors have irrevocably committed their own shares to vote in favour of the deal.
Timetable and conditions
The transaction is subject to standard conditions including shareholder approval at a Court Meeting and General Meeting, and clearance under the National Security and Investment Act. If approved, completion is targeted by the end of the second quarter of 2025. A detailed scheme document, including a valuation report, is expected within 28 days.
Commentary
HEIT Chair Norman Crighton said the board believes the offer maximises value for shareholders and provides an attractive exit at a premium to medium-term standalone prospects.
Drax CEO Will Gardiner said the deal adds scale and flexibility to Drax’s UK power generation assets, supporting energy security and enabling 4.5GW of dispatchable capacity as part of the energy transition.
[QD comment MR: It is good to see that an even better deal than the 84p offer from Foresight (click here to see our coverage of this) is now on the table for HEIT shareholders and we’re not particularly surprised that it has got the blessing of HEIT’s board. However, it is still at a discount to NAV – 4.7% to the last published NAV of 92.38p per share – and still 12p below the original issue price, reflecting the challenges that UK BESS assets have experienced. We think that like Foresight’s proposal, if successful, Drax could be getting itself quite a bargain. We note that progress is being made to resolve the problems BESS assets are facing in the UK and continue to remind investors of the potential read across to Gore Street Energy Storage (on a 44% discount) and Gresham House Energy Storage (on a 48% discount), with this transaction suggesting substantial upside potential in those share prices. In Gore Street’s case, the anticipated receipt of cash from its US tax credits could still be the catalyst needed to kickstart this process.]
