The deal is signed: Generation fund will acquire Shikun & Binui Energy

The Generation Capital fund is acquiring Shikun & Binui Energy for 4.45 billion shekels, the companies announced. With this, the competing offer from the Keystone fund is rejected. This is a significant acquisition deal that positions Generation as one of the prominent players in the electricity production sector — to such an extent that it is expected to be required to take complementary steps before the Competition Authority to reduce concerns about market concentration.

In the event that the regulator does not approve the deal, Generation agreed to pay 300 million shekels as a fine to Shikun & Binui Energy. On the other hand, Shikun & Binui committed to pay 300 million shekels to Generation in the event that it agrees to the competing offer from the Keystone fund. As reported in Globes, the negotiations on the deal dragged on longer than expected due to disagreements regarding the correct response to the regulator's decisions.

The energy company of the Generation fund, PowerGen, is trying to establish itself as one of the strongest players in the energy market. It is building the Reindeer power station, which was recently approved by the Electricity Authority, and is aiming to expand through the acquisition of Shikun & Binui Energy.

The acquisition will be carried out by way of a merger, in exchange for a sum of 4.45 billion shekels. Originally, the sum was divided between 4.2 billion and 300 million shekels conditional on meeting milestones related to the advancement of significant existing projects of Shikun & Binui Energy, but in the end, it was agreed that a (reduced) payment would be made at once. This is because Generation feels comfortable with the development progress of the projects they will acquire from Shikun & Binui. For the purpose of financing the deal, the fund is expected to join a group of institutional bodies that will invest in PowerGen as part of the move.

Shikun & Binui Energy, managed by Yuval Skornik, which is controlled by the construction and infrastructure group Shikun & Binui (67%), holds a backlog of electricity production projects with a current volume of about 3.2 gigawatts. This is through holdings in the Ramat Hovav, Orot Pnina (Hagit), and Etgal power stations, as well as a backlog of renewable energy and energy storage projects.

Regulatory difficulties expected

The main "candy" for PowerGen is actually the renewable energy assets of Shikun & Binui Energy. Since today, only renewable energy can sell cheap electricity to private suppliers, this fits well with one of Generation's significant holdings — BezeqGen, the largest private household electricity supplier in Israel. The move is expected to allow it to expand 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 deal with the shortage.

Admittedly, the deal is expected to encounter difficulties from the regulators — the Competition Authority and the Electricity Authority. The authorities are concerned about concentration in the electricity production sector, and recently they even blocked the expansion of the Dorad power station due to the minority shares of Edeltech 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 completion of the deal, the parties intend to carry out a swap deal with the Rapac company, which holds shares in the Alon Tavor and Reindeer (which has not yet been built) power stations together with PowerGen. As part of the deal, Rapac will receive PowerGen's share in Alon Tavor, and in return, PowerGen will receive Rapac's share in Reindeer. This move will effectively carry out a "separation of forces," which will reduce the share of each of the companies and may also reduce the concern of the regulators regarding concentration. At Generation, at this stage, they estimate that they will be able to pass the regulatory obstacle through the swap deal and additional adjustments, as required.

In addition to the swap deal with Rapac Energy, intended to reduce the level of concentration in the electricity market and satisfy the regulator, Generation is also promoting the regulation of the management of the Reindeer station together with the one expected to be the new partner — Ofer Yanai from Nofar Energy.

The Electricity Authority has recently positioned itself as the "new sheriff in town": it both blocked the submission of connection requests for server farms for 140 days, and examined the issue of concentration in the storage sector when it finally approved the Reindeer power station. Will such a swap deal satisfy the Electricity Authority? It is too early to tell.