LONDON (ResourceInvestor.com) -- The consensus opinion on Britain’s Centrica [LSE:CNA] is that it is at a crossroads; that it must either acquire or be acquired in order to attain a viable long-term scale. The company is currently the largest force in the UK’s retail gas market, the legacy of its origin as part of a state owned monopoly, but is suffering at the hands of high and volatile upstream natural gas prices.
Centrica’s market share is also under pressure, and the company warned recently that this year’s profits would fall below expectations despite an across the board increase of 14.2% in retail prices charged to customers. This increase does not reflect the full rise in Centrica’s costs, but the company is choosing for now to moderate its price increases in order to try and safeguard its market share from further erosion by ominously strengthening competition.
For these reasons the revelation that Malaysia’s Petronas has taken a 4% stake in Centrica, a tranche of shares estimated to be worth around £400 million, has caused some excitement. Petronas has said publicly that it has no imminent intention to increase its stake, and describes it as a “long-term supportive investment,” but in spite of this the market is undoubtedly wondering what kind of game the Malaysian company is playing. The utility to Petronas of such a small stake in Centrica is questionable, which ergo raises the prospect of a further increase in Petronas’ stake to a meaningfully strategic level, and maybe a takeover of or merger with the entire company.
Multiple possible benefits from such a move by Petronas can be identified. Petronas would acquire significant and relatively ironclad access to one of the world’s largest and most stable gas markets for its global production, as well as adding to this by taking control of Centrica’s upstream offshore UK assets. Centrica would gain the scale the market seems to think it lacks, as well as upstream supplies to meet its supply obligations as its own production begins to decline.
Petronas is not the only mooted suitor for Centrica. The latter’s share price has climbed markedly since mid July on the back of intense bid rumours centring most recently on Russia’s Gazprom, but also on Norway’s Norsk Hydro, oil & gas Super Major Shell, and Gaz de France. The disclosure by Petronas of its stake is just the latest and most interesting development in the saga.
Based upon Petronas’ $9 billion profits for the last financial year and its strong position in the global upstream gas market, the Malaysian company seems to have the financial capacity to bid for or materially increase its stake in Centrica, which is today valued at around £9 billion.
Closer involvement with Centrica by Petronas would complement the investments the latter already has in the UK gas market; a 30% stake in the under construction Dragon import terminal in Wales, a facility expected to be capable of supplying around 6% of current national annual consumption when completed, and 19% of Star Energy [AIM:STAR], which is developing a sizable gas storage depot in southern England slated to become operational later this year.
Petronas has an avowed intention to increase its exposure to what it terms the “Atlantic Basin” gas markets to complement its position in the Asia-Pacific markets. In an allusion to at least some further expansion of the relationship between Petronas and Centrica, the former said in a statement that it “hopes to build a positive and constructive relationship with Centrica’s management in the future,” building on the 15 year, £4 billion LNG supply agreement signed between the two last year.
As to the political aspect of an acquisition of Centrica by a foreign firm; Petronas would probably face fewer objections than would Gazprom, recently considered by the market to be the most likely alternative purchaser, and a Petronas deal would likely not be obstructed by the government. Indeed, any move which lessens the likelihood of further UK retail gas price hikes, as a deal with Petronas could by improving Centrica’s supply upstream situation, might be politically welcome.
All in, a deal resulting in a takeover, strategic stake or just enhanced cooperation between Centrica and Petronas is worth examining from the point of view of both companies, and this as well as the possibility of a pre-emptive strike from another suitor for Centrica and an ensuing bidding war should put the company’s shares firmly on investors’ radars for the time being.
