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Energias de Portugal's [ELI:EDP] proposed offer for EDP Renovaveis [ELI:EDPR] undervalues the renewables group, said three of the target’s shareholders.

David Maywald of RARE Infrastructure, which holds 1.9% of shares in the renewables group, said that RARE will not tender into the offer at the current price.

Two other investors, Murray Rosenblith of the New Alternatives Fund and Thomas Perrotin of Moneta Asset Management, agreed that not tendering their shares was an option they could consider.

On Tuesday (28 March), EDP announced plans to acquire the 22.5% of share capital it does not already own in its subsidiary EDPR through a EUR 6.80-per-share tender offer, valuing the company’s total equity at EUR 4.36bn. EDP plans to delist the subsidiary if it crosses the 90% threshold.

“We think that EDP is getting a bunch of good assets for too little money,” said Rosenblith, whose fund owns around 1.5m EDPR shares, representing 0.17%.

EDPR's growth pipeline, strong track record and its assets mean the offer is very low, according to Perrotin, whose fund holds around 0.5% of EDPR shares. He noted that the company had already secured 65% of its 2016-2020 growth target.

The key valuation issue flagged by the three investors is that the deal values EDPR at less than EUR 1m enterprise value (EV)/mega watt (MW). This compares to the EUR 1.7m/MW at which EDPR sold assets in February, and an average of EUR 1.5m/MW for seven deals executed by EDPR since 2014, according to a recent company presentation.

This valuation gap was also raised on a 28 March conference call, by Maura Shaughnessy, of Massachusetts Financial Services, which owns 4.1% of EDPR.

The deal implies an EV of EUR 8.73bn. In the March investor presentation, EDPR says that its EV is EUR 11.3bn, and its EV “installed capacity” EV is EUR 10.95bn (based on equity at EUR 6.4 per share).

A fundamental value above the IPO price of EUR 8 per share can be justified based on the company's own analysis of EV/MW and capitalisation of retained cash flow, said Maywald. The group expects retained cash flow to grow by 10-15% in 2017, according to the same presentation.

Two sector bankers thought that EDP's offer was too low, as previously reported. But another banker said that recent renewable sector deal multiples have been unsustainably high and the price was reflective of a return to normal trading.

A spokesperson for EDP could not be reached for comment.

“It makes economic sense for EDP to do this now as it [EDPR] is at a low point,” said Rosenblith. The election of Donald Trump resulted in a dramatic fall in EDPR's share price due to concerns about changes to energy policy."

Despite this, Perrotin highlighted the resilience of the US market and noted EDPR's successful asset sales since the election. North America accounts for 48% of EDPR's 10.4 GW total installed capacity, according to the March presentation. The group plans to expand this capacity by 3.5 GW by 2020, with 65% of that planned capacity in North America.

Both Murray and Perrotin cited the examples of other diversified utilities that had listed renewables divisions, then taken them private.

In 2015, Italian group Enel [BIT:ENEL] announced an offer to minority shareholders of Enel Green Power, at a 17.1% premium to the share price one month prior to the deal announcement.

The EDPR offer represents an 8.45% premium to EDPR's closing price one day before the announcement and a 9.7% premium to the share price one month prior. Based on the volume weighted average price for the six months before, the offer is at a 10.5% premium, according to the announcement.

On the 28 March conference call, the EDPR offer was compared to the Enel deal. But Perrotin noted that this comparison was disappointing as Enel Green Power did not benefit from the same reputation as EDPR, with the latter deserving a higher premium.

Spain's Iberdrola [BME:IBE] bought back its Iberdrola Renovables unit in 2011, after a 2007 IPO. The offer was at a 14.26% premium to the renewables group's share price a month before the deal was announced.

Also in 2011, EDF [EPA:EDF] offered minority shareholders in EDF Energies Nouvelles EUR 40 per share in cash, at a 24.22% premium to the share price one month before the announcement.