Spin off of Italgas could create value to shareholders according to Snam
As we mentioned in our 2016 outlook, we believe the European utilities sector could be marked by
portfolio makeovers in 2016. Today was Snam's turn. According to the company, Italgas – Snam's gas
distribution business in Italy – could be demerged in whole or in part from the Group. Although no
major details have been provided the management suggested that this: 1) could improve the financial
flexibility of both companies; 2) makes sense given the differences of both businesses, and 3) that it
could create value to shareholders. Further details should be provided during the 2016-19 strategic
presentation in July.
What is on the table for Snam and for shareholders?
Given that the gas distribution sector in Italy is currently under a consolidation process, in our view a
demerge would mostly provide funding flexibility to Italgas to consolidate in this market and some
flexibility at Snam to continue pursuing its international expansion strategy. Although nothing has been
said regarding a potential tie up between Italgas and its largest competitor 2i Rete gas, as reported
recently by the Italian media (La Repubblica), we believe that this could be supportive.
Potential spin-off mechanics
In practical terms, Snam is considering a potential spin-off of Italgas, or in other words distribute Italgas
share through its shareholders. Assuming an EV for Italgas equivalent to 1.2x RAB (€6.8bn) and a ND-to-
RAB of ~40% (~$2.0bn), it means that the company is worth roughly €1.0 per Snam's share, or roughly
>20% of its current mkt cap. At the end of 2015 the company reported an EBITDA of over €700m,
which could be up to over €800m if the company sticks to its target to increase market share in the
Italian distribution market by 12% to 45%.
Valuation: reiterate our Buy rating and €5.3 PT
Our Buy rating on Snam is based on 3 key reasons: 1) solid long term growth potential; 2) attractive div.
yield of ~5%, one of the highest in the sector; and 3) DPS sustainability with upside potential despite
expected regulatory headwinds in 2018. Our €5.3 PT is the average of a target PE (16.5x) and DY (5%),
cross checked by our DDM model.