Novera in play

Over the past few days, Novera has announced that it is in talks which may lead to a bid for the company at a price of 90p. 3i has just broken cover to day that it's the possible bidder. Now, there's many a slip twixt cup and lip, but let's see what this means.

A bid at 90p values Novera at £111 million. According to the company's website, there was a cash balance of c. £10.8 million at 31st December 2007, making the wind and other renewables assets worth near enough £100 million.

On a multiple basis, Novera's revenue for 2007 was expected to be around £34 million, making the offer price 3 times turnover. Figures for 2007 aren't available yet, but EBITDA in 2006 was just shy of £10 million on revenue of £31 million. Since the company was apparently debt free in 2006, let's assume that interest is minimal and the accounts show that depreciation was very small and there was no tax charge as tax losses exceed profits, so we can probably infer that the post tax profit was around £10 million, making the multiple an apparently conservative 10 times 2006 earnings.

Looking at the valuation from the asset side: the portfolio is dominated by the wind assets:

Status Capacity
Operating sites: Mynydd Clogau, Wales 14.5 MW
Consented sites: Lissett Airfield, East Riding 30 MW
Sites in Planning: Mount Boy, Angus, Scotland 6 MW
Sites in Planning: Fleeter Wood, Cumbria 10 MW
Sites in Planning: Glenkerie, Scottish Borders 22-27 MW
Sites in Planning: A'Chruach, Argyll and Bute 40-48 MW
Additional sites in pre-planning: 300 MW

The recent Airtricity experience suggests that buyers are prepared to pay £2 million/MW or more for installed capacity, and perhaps £1 million/MW for consented sites (leaving the other £1 million/MW to pay for the actual development costs of the project). This would amount to £29 million for Mynydd Clogau and £30 million for Lissett.

We think that Novera still has the 112 MW of landfill gas capacity it had in 2005. So looking for landfill analogues...

In 2004, Viridor paid £30 million for 45 MW of landfill capacity, and in 2006, Pennon paid £25 million for 7 MW of landfill capacity. Taking the lower basis for valuation, Novera's landfill would be worth around £60 million. (Taking the higher, it would be worth nearly £400 million, which seems extraordinary - there must be more in that deal we haven't seen).

So we've found £60 million of wind value, without the development pipeline, and £60 million of landfill value and £10 million of cash.

In the mid 2007 trading statement, net debt was around £72 million with £17 million in the bank, so if this hasn't changed, the asset value is £130 million plus the value of the development pipeline minus £90 in debt.

With the bid at £100 million, the development pipeline is being implicitly valued at around £60 million by 3i. For, say, 80 MW in planning you might apply a risk factor of 50% and value as if it's consented (ie, half the project capacity eventually gets consented). This would give you another £40 million, so you're getting the development pipeline for £20 million. If you were to risk this at 20% and apply the same valuation of £1 million/MW - you get to £60 million. On this basis, the development pipeline is worth £100 million, but it would seem that 3i is offering £60 million for it.

So either we've missed something important, or 3i is risking future developments more aggressively (or thinking they'll cost more to deliver) or 3i's getting a bargain if the deal goes through!