Naturgy, Sonatrach to Control Medgaz Line

Naturgy and Algerian state monopoly Sonatrach have agreed to buy the 42.09% stake in the Medgaz gas pipeline held by UAE sovereign wealth fund Mubadala, the Spanish utility said October 15. Medgaz will then be entirely owned by Sonatrach (51.0%) and Naturgy (49.0%), with a shareholder agreement that gives them joint control of the line.

Spain has very limited pipeline links with the rest of Europe, and is therefore exposed to the risk of high LNG prices. Owning more of Medgaz gives both partners greater value from the gas transported, with ship-or-pay covering all the capacity until 2031.

Naturgy CEO Francisco Reynes said the deal was "highly attractive" in terms of the price and the stable and predictable long term dividends. This meets its shareholder value creation criteria, he said, and is thus "consistent with Naturgy’s 2018-2022 Strategic Plan."

Naturgy had held a 14.95% financial stake which brought very limited governance rights. It is paying €445mn ($491mn) for the 34.05% stake through a special purpose vehicle which can be opened to a financial partner thus reducing Naturgy's equity contribution. The SPV will be funded with a non-recourse loan of €260mn.

The transaction values 100% of Medgaz's equity at about €1.3bn with an enterprise value of about €1.9bn, equivalent to 6.9 times the expected pre-tax earnings in 2021, including the approved 2bn m³/yr  expansion programme that will bring the capacity to 10bn m³/yr. This will be fully operational in 2021 at a cost of €67mn. Medgaz is expected to deliver dividends above €130mn/yr from 2021 onwards.

Sonatrach owns the gas pipeline that runs from the Hassi R’Mel gas fields to Beni Saf on the Algerian coast, where it connects with Medgaz. The Medgaz pipeline connects in Almería to the Spanish transport network, operated by Enagas.

The deal is expected to complete by the end of next March, subject to compliance with certain conditions and approvals and will not affect the share buy-back programme. Sonatrach is Naturgy's fourth largest shareholder with 4%.