Funny how fortunes can change. Nuclear engineering group Areva was once seen by the French government as a possible saviour for then struggling engineer Alstom. Today, Areva could use some brotherly love itself. On Monday, electric utility EDF’s share price fell 3 per cent after energy minister Ségolène Royal suggested that a merger was possible between Areva and EDF, both of which are listed but state-controlled. But their shared interest in nuclear power does not mean that a deal makes sense.
Areva’s financial position has weakened since 2008. The integration of its uranium mining, fuel processing and engineering arms was meant to produce a national champion, able to sell its wares internationally. Instead, Areva has struggled with cost overruns at a big engineering project in Finland. Ten years behind schedule, it has taken nearly €5bn in writedowns.
Areva does offer access to uranium, the building block for nuclear fuel, via its mines. Yet, the poorly timed purchase of UraMin, a Canadian uranium miner, in 2007 has cost the company dearly. Spot uranium prices have more than halved since then. Meanwhile, net debt has climbed 70 per cent since 2010. Areva has lost money for the past four years.
Absorbing lossmaking Areva would reduce EDF’s earnings a share by 5 per cent, even assuming that its own aggressive three-year cost-cutting plan of €1bn comes through. And adding Areva’s €6bn of net debt could threaten EDF’s credit rating, which Moody’s puts at Aa3 with a negative outlook.
Moody’s already has concerns about EDF’s ageing French nuclear power stations and the investment required for safety improvements and upgrades — the rating agency puts that at €55bn over the coming decade. This at a time when EDF faces a greater challenge from renewable energy sources.
EDF’s valuation of less than 11 times estimated earnings is a fifth below its European peers. Bringing Areva into its home will only widen that gap.
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