The US$1.082 billion valuation of Mirant Corporation's Caribbean assets to be sold to Marubeni appears to be based on total 'enterprise value', the theoretical takeover price to buy all the acquiree's outstanding shares plus the company's debt but subtracting the cash which the acquirer effectively pockets.

The deal announced April 18 by New York Stock Exchange listed Mirant included "related debt of approximately $350 million, powerpurchase obligations of approximately $153 million and estimated working capital at closing."

The buyer Marubeni was founded in 1858 as one of Japan's famous international trading houses, and today has operations in 74 countries in Asia, the Middle East, Europe, Americas.

Ranked at 215 in 2006's Global 500 - Fortune Magazine's listing of the world's largest companies - it is strong financially.

Expansion

Marubeni states that it wants to expand beyond its current substantial interests in international power production into transmission and distribution, accounting for its particular interest in the 600,000 households Mirant supplies in Grand Bahama and Jamaica.

The majority of the US$350 million in debt to be assumed by Marubeni was issued by Jamaica Public Service Company (JPS), apparently financing for the estimated US$200 million in capital expenditure over the six year period since it purchased JPS almost "debt free" for US$201 million in March 2001.

In the first week of July last year, JPS had raised US$180 million by way of an unsecured international 10-year bond with an interest rate of 11 per cent, replacing approximately US$168 million of higher cost financing from RBTT, which was the biggest private offering from a non Government owned Jamaican corporate entity.

This bond may have to be repaid triggered by the change of control.

Responding to Opposition spokesman on Energy's Clive Mullings challenge in the sectoral budget debate on energy to name the price for the sale of JPS on the same day of the announcement, Minister of Finance Dr. Omar Davies stated, "I believe the value of the transaction for JPS, which is 80 per cent of JPS shares is US$800 million."

However, informed sources close to Mirant advise that the true figure for the sale price of JPS was "substantially less than US$800 million."

Davies, on the same day that Wednesday Business, sister to The Financial Gleaner, broke the story that Mirant would net US$350 million from the sale, Davies went to Parliament with a deeper explanation of his figure.

He affirmed the US$800 million as a gross figure, but confirmed that the net flows to Mirant would be US$350 million.

Mirant insiders say the US$580 million that Marubeni advised that it was paying for all of the assets of Mirant Caribbean Holdings is a much better guide to its return from the sale of its Caribbean investment, of which JPS is only a part.

This figure corresponds with what Mirant stated to be the expected "net proceeds of the sale" or what it would get in cash, of approximately $565 million after payment of transaction costs, which it estimated at approximately $14 million.

The sources also pointed out that with the exception of a minor amount for preference shares, "for the first three years JPS paid no dividend", only paying ordinary dividends at the end of 2003 to its parent.

A review of their annual reports suggests that JPS also appears to have skipped paying dividends in 2004 it made another substantial dividend payment in the following year in 2005.

Despite limited information, it is possible to get a feel for the price at which Mirant sold JPS by doing a sum of the parts valuation of its various assets.

Mirant's Caribbean business includes the controlling interests in two integrated utilities: JPS of which Mirant owns 80 per cent and Grand Bahama Power Company of which Mirant owns 55 per cent.

Mirant also owns 39 per cent of PowerGen, the owner and operator of three power plants in Trinidad, 25 per cent of Curaçao Utilities Company (CUC) which provides electricity and other utility services and a US$40 million convertible preferred equity interest in Aqualectra, an integrated water and electric company in Curaçao.

Using Mirant's "equity method" carrying value on its December 31, 2005 balance sheet, its stake was worth US$32 million, while its US$40 million convertible 16.75 per cent preferred was valued at par.

Approximately half of the Bahamas based Grand Bahama Power Company (the portion not owned byMirant) is held in a separate company quoted on the Bahamas stock exchange called ICD Utilities.

With 10 million shares outstanding, at its current market price of US$7.25, this half is valued at US$72.5 million, which may be an underestimate as the stock is significantly off its high.

Subtracting our estimated total valuation for these entities of approximately US$150 million from the US$580 million paid by Marubeni leaves us with a value for Mirant's 80 per cent of JPS and the 39 per cent of Trinidad's independent power producer Powergen of US$430 million.

According to Marubeni, Powergen's 1,365 megawatt output - the company supplies 80 per cent of Trinidad's electricity requirements - is more than twice JPS' installed capacity of 621 MW.

On a 'look through' basis, adjusting for Mirant's smaller equity stake in Trinidad, the value of the generation assets purchased in Trinidad might appear to be approximately equal to that of JPS. But, unlike Powergen, JPS also has a substantial retail business. Including all its transmission and distribution assets should make Mirant's stake in JPS significantly more valuable than Powergen, particularly as integrated utilities are in any case regarded as less risky by the capital market, and therefore deserving of higher valuations.

Mirant expects to realise a pre-tax gain of approximately US$65 million for financial reporting purposes and a gain for tax reporting purposes of approximately US$150 million" from the sales, a substantial portion of which will undoubtedly be from the sale of JPS.

keithcollister@gleanerjm.com

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