Iberdrola to Sell Most of Its Mexican Assets for $6 Billion

We don’t expect to materially change our EUR 10.60 fair value estimate after no-moat Iberdrola IBE announced it reached an agreement to sell most of its Mexican combined-cycle gas turbines to Mexico Infrastructure Partners, an infrastructure fund backed by the Mexican government, for $6 billion, in line with our valuation. Further, we are not unhappy to see the company slashing its exposure to a country where it was facing growing hostility from the government. The deal is expected to be closed by year-end pending final agreements and regulatory approvals. Shares are in 3-star territory.

Iberdrola agreed to sell 12 CCGTs and one wind farm with total capacity of 8.5 gigawatts—that is 78% of the group’s capacity in Mexico. Still, assets sold would have achieved a 2023 EBITDA of $500 million or 58% of the expected 2023 EBITDA in Mexico according to the group. In our sum-of-the-parts valuation, we value 100% of the Mexican power plants at EUR 9.1 billion, implying a value of EUR 5.3 billion (58% of EUR 9.1 billion) or $5.8 billion for the assets sold, in line with the transaction price. The latter implies a 2023 EV/EBITDA of 11 times and will drive a 0.2 improvement of the 2023 net debt/EBITDA ratio according to the group. Upon completion of the transaction, Iberdrola will have completed 90% of the asset rotation and partnerships targeted over 2023-25. Assets sold were expected to generate a 2023 net income of $90 million, less than 2% of Iberdrola’s net income. In any case, this net income should be more than offset by reinvestment earnings.

Regulatory deterioration left not much choice to Iberdrola. Thus, Mexican president Andres Manuel Lopez Obrador hailed the deal as a new nationalization. Since he took office in 2018, he reversed a 2013 constitutional change that opened the energy markets to private firms by going after them in order to restore the dominant position of former state monopolies.