On the way to closing the giant deal of the energy market: the dispute that was resolved and the one that remains open
The Generation fund is nearing the acquisition of Shikun & Binui Energy for 4.2 billion shekels, after the parties reached understandings on the compensation mechanism in case the deal is not completed. Now the parties are preparing to finalize the last agreements and have the merger examined by regulators, who are concerned about the concentration in the electricity production sector.
Today, the exclusivity period set for negotiations on one of the largest acquisition deals ever formed in the Israeli electricity market is expected to end: the Generation fund seeks to acquire Shikun & Binui Energy and merge it with its energy company, PowerGen, in a deal worth 4.2 billion shekels, alongside a conditional payment of up to 300 million shekels depending on milestones.
It now appears that the parties are approaching the final stretch, having resolved one of the central disputes between them — the mutual penalty mechanism in the event that the deal is not approved by regulators or if Shikun & Binui ultimately prefers the counter-offer from the Keystone fund.
Now, it remains for the companies to agree on the payment details for the milestones in expanding electricity production. In the background, two additional deals are progressing: a swap deal with Rapac Energy, intended to reduce the level of concentration in the electricity market and satisfy the regulator, and the regulation of the management of the Reindeer power station together with the one expected to be the new partner — Ofer Yannay from Doral Energy.
Institutional investors will join
PowerGen, the energy company of the Generation fund, is working to establish its status as one of the central players in the energy market. The company is building the Reindeer power station, recently approved by the Electricity Authority, and at the same time seeks to expand through the acquisition of Shikun & Binui Energy.
The deal is expected to be carried out by way of a merger for 4.2 billion shekels, alongside a conditional payment of up to 300 million shekels, depending on the progress of material projects held by Shikun & Binui Energy. To finance the deal, the fund is expected to join a group of institutional entities that will invest in PowerGen as part of the move.
Shikun & Binui Energy, managed by Yuval Skornik, is controlled by the Shikun & Binui group (67%) and holds a portfolio of assets for electricity production with a capacity of about 3.2 gigawatts. Among its assets are the Ramat Hovav, Orot Pnina (Hagit), and Atgal power stations, as well as a portfolio of renewable energy and energy storage projects.
The main asset that PowerGen hopes to obtain is precisely the renewable assets of S&B Energy, since today only renewable energy can sell cheap electricity to private suppliers. This fits exactly with one of their significant holdings: BezeqGen, the largest private household electricity supplier in Israel (together with Bezeq). This will allow them to grow significantly precisely at a time when there is not enough cheap electricity available, and the Electricity Authority has stopped the cheap electricity tenders for suppliers intended to overcome this.
Since last week, the parties have been extending the exclusivity period for discussing the deal between them every few days. The current extension period is expected to end today, but if the deal is not signed by the evening, it is estimated that it will be extended once more. During this time, Shikun & Binui cannot discuss the counter-offer from the Keystone fund.
The regulatory hurdle
The deal is expected to encounter difficulties from regulators, mainly the Competition Authority and the Electricity Authority. The authorities are concerned about the concentration in the field of electricity production and recently blocked the expansion of the Dorad power station due to the minority shares of Adaltel in it, the largest private electricity producer in Israel.
To prevent a similar move against PowerGen, which will become one of the largest energy companies in Israel after the deal, Generation is promoting a swap deal with the Rapac company, which holds shares together with PowerGen in the Alon Tavor and Reindeer (not yet built) stations.
A deal in which Rapac will receive PowerGen's share in Alon Tavor, and in return PowerGen will receive Rapac's share in Reindeer, will perform a "separation of forces" that will reduce the share of each of them, which will likely reduce the regulator's concern. At Generation, at this stage, they feel confident in their ability to overcome the regulatory obstacle with the help of this swap deal, and other adjustments as required.
Despite this, the matter is still in question, and Shikun & Binui Energy insisted on including a compensation mechanism in the agreement in case the regulators do not approve the deal — a demand that was accepted. On the other hand, Generation demanded and received its own compensation mechanism, which will apply if Shikun & Binui ultimately chooses to sign a deal with the Keystone fund. This penalty will put Keystone at a disadvantage from the start, as they would have to pay hundreds of millions more for it to be worthwhile for Shikun & Binui.
Now, there remains a "last minute" issue before closing the deal: the amount of conditional payments according to the development milestones, so that Generation will pay more as they succeed in developing the assets they are acquiring. In addition, Generation is working to approve two "side" deals: one, the mentioned swap deal with Rapac Energy, and the second, coordination in the management of the Reindeer power station. Doral is expected to purchase the Phoenix's share in the Reindeer power station, which will complete a material change in its ownership and management composition. After these deals, PowerGen will become one of the most prominent electricity production companies in Israel.
