Intelligent Energy (IEH) has signed an agreement to acquire GTL’s energy management business, which provides energy to over 27,400 telecom towers in India, for £85m ($129m). The transaction is expected to generate long-term recurring revenues worth £1.2bn ($1.8bn) over 10 years. Management expects EBITDA margin for this activity to rise from c 15% to 30-35% (c £40m or £61m per year), within three to five years. We revise our estimates and indicative valuation to reflect the transaction, giving a base case fair value of £471m ($717m).
The GTL transaction is important because the DP&G division represents a mechanism to generate profits from the fuel technology without waiting for widespread adoption of fuel cell vehicles. The deal also provides a platform for the large-scale economic deployment of fuel cells as a distributed power solution. The Motive division has recently announced participation in an EU-backed development program for which BMW Group and Daimler are specifying the stack requirements. In August, the CE division demonstrated that its fuel cell technologies can be embedded in cell phone and tablet hardware without reducing either existing functionality or battery capacity. This is a critical step in evolving from the standalone Upp, launched in late 2014, to a fully embedded commercial offer.
Growth depends on IEH’s ability to fund the acquisition of energy assets relating to telecoms towers. The consideration payable for the energy management business comprises £25m ($38m) cash and £60m ($91m) debt sourced from Indian banking markets. A further doubling in divisional assets during FY16 is expected to be funded from asset finance. There remains a short-term funding gap, estimated at £65m ($99m). IEH intends to raise additional funds through a proposed issue of a convertible instrument to industrial partners involving a strike price at a premium to the current share price and realising value from its DP&G Indian operations.
Our sum-of-the-parts analysis gives a risk-adjusted base case indicative valuation of £471m ($717m). The potential value arising if DP&G achieves management’s target of 135k towers by end FY17e is explored in the body of the note. This analysis excludes any value associated with long-term royalties for the Motive division or licence fees and royalties for the Consumer Electronics divisions.