Good afternoon, ladies and gentlemen, and welcome to the call on disposal of Snam, hosted by Paolo Scaroni, Chief Executive Officer, and Alessandro Bernini, Chief Financial Officer. The call will start with a presentation and will be followed by analyst Q&A session. After the end of the Q&A session, we will hold a press conference for journalists. Until that time, journalists will be in listen-only mode. I'm now handing you over to your hosts to begin today's conference. Thank you.
Good afternoon, ladies and gentlemen, and thank you for joining us on this call on the disposal of our stake in Snam. Unlocking value from our holding in Snam, a fully unbundled and regulated company, is one of Eni's stated strategic objectives. We first identified Snam as a non-core asset in March 2011, and have since been studying options to maximize its value through a divestment. Within this context, the pace has been regulated by the Italian government, which set the ball rolling in January, firmed up the legal framework and timeline in March, and finalized the divestment conditions last Friday, identifying Cassa Depositi e Prestiti as the buyer for a controlling stake.
We are pleased that we have been able to reach a rapid deal with Cassa Depositi e Prestiti, and today, Sandro and I will take you through the terms and conditions of our transaction, our thoughts on the remaining stake in Snam, and give you some initial visibility on what Eni will look like after the Snam disposal has been completed. First, let's take a look at the transaction with Cassa Depositi e Prestiti. As some of you may remember, we set out the criteria by which we would evaluate the disposal of Snam in our strategy presentation last March. These criteria were, first, the transaction should be positive for Eni shareholders. Second, the transaction should protect Snam shareholders by limiting the overhang on Snam shares. Thirdly, lastly, the disposal should strengthen Eni's balance sheet in view of its very attractive organic growth opportunities.
We believe the disposal meets all three criteria. First, it is positive for Eni shareholders. Cassa Depositi e Prestiti is paying EUR 3.47 a share for a controlling 30% stake, a 3% premium to trading prices in the 30 days before the issue of the DPCM last Friday, and a 5% premium to Snam's 2011 regulated asset base. Second, it protects Snam shareholders from an excessive overhang. More than half of our stake will be sold to a stable long-term holder. There is no time limit on the sale of our residual shares, which means we have the flexibility to maximize value creation while minimizing market disruption. Thirdly, at the end of the process, Eni will have cashed in something in excess of EUR 6 billion and deconsolidated over EUR 11 billion of debt. There is no doubt that the new Eni will be a stronger company than it is today.
Sandro will now take you through what it will look like.
Thank you, Paolo. To give you an idea of the impact of the disposal of Snam on Eni, I will take you through what we would have looked like in 2011 if the transaction had already taken place. Looking at our balance sheet first, we ended 2011 with net debt of EUR 28 billion and a shareholders' equity of around EUR 60 billion. If you factor in the sale of our entire stake in Snam, so the deconsolidation of over EUR 11 billion of debt, EUR 3.5 billion of cash-in from the CDP transaction, and EUR 2.8 billion of cash-in from the sale of the remaining stake at current market values. Eni net debt falls from EUR 28 billion to less than EUR 11 billion. At the same time, the disposal would have a positive impact on our shareholders' equity, which would rise from EUR 60 billion to over EUR 62 billion.
Overall, the disposal of Snam would therefore improve leverage from 0.46 at year-end 2011 to less than 0.20 on a pro forma basis. Looking at our profit and cash flows, the deconsolidation of Snam from the full year 2011 would reduce our EBIT by 12%. However, the impact on free cash flow would be negligible, as Snam invests roughly the whole of the cash generated by its operations. In strategic terms, as a consequence of the disposal of Snam, Eni will be a much more upstream business than it is today. Looking at our capital employed, E&P will account for almost 60% of Eni, up from almost 50% at the end of 2011, while gas and power will fall from over 30% to 17%. The consolidation of Snam will also boost Eni's adjusted returns on average capital employed from the 2011 level of 9.9% to a pro forma of 10.4%.
Ladies and gentlemen, thank you for your attention. I will now hand you over to Paolo to wrap up.
Thank you, Sandro. We will give you more information on the strategy of the new Eni at our usual market update next March. It is clear that we will be in a better position to deliver industry-leading growth and robust returns. First, our new balance sheet, which we consider fully or more focused on Eni, will protect us from market volatility. Second, we will leverage on our financial strength to continue to invest in our high-return upstream projects and in the new fields that our world-class exploration continues to deliver. On top of the 4 billion BOE discovered over the past four years, since the start of 2012, we have already added well over 1 billion BOE on new resources from major discoveries in Mozambique, Norway, Gulf of Mexico, Egypt, and secure promising acreage in Russia and Indonesia. Third, we will continue to reward shareholders.
By the end of the year, our business structure and balance sheet will be more similar to our peers. When that happens, we will adjust our method of rewarding shareholders in line with industry practice, with the launch of a new buyback program on our shares. Thank you for your attention, we'll now be pleased to answer your questions.
Are there any questions from the floor? May I start the Q&A session? Yes, you may. I'm sorry. Ladies and gentlemen, the Q&A session is now open. I'd like to remind you that if you want to register for your questions, please press star followed by one. To cancel the reservation, press star followed by two. Thank you. First question comes from Mr. Alberto Gandolfi from UBS. Mr. Gandolfi, please go ahead.
Hi, good afternoon. It's Alberto Gandolfi, UBS Utilities. I wanted to ask if you could shed some light on the remaining stake in Snam, and particularly, could you elaborate if you are considering a retail offering in Italy? How much you're thinking about splitting between long-term strategic investor vis-a-vis a place in the open market. Thank you so much.
Well, as per the DPCM, I don't know if you have had the possibility to go through the decree, but the decree specifically provide that Eni has to adopt transparent and non-discriminatory market procedures. It means that as soon as it will be practicable, because we are still doing a legal analysis of the DPCM in order to assess finally when it will be possible to start with the disposal of the remaining stake, then considering what we did at prevailing market condition, then we will decide the most appropriate procedure to dispose our stake. We do not exclude, however, we don't exclude for sure the possibility to place a portion of the remaining stake on the retail Italian market.
Thank you.
Next question comes from Mr. Jon Rigby from UBS. Mr. Rigby, please.
Thank you. Someone dominating the start of this, I apologize. Couple of questions. The first is, I think, Mr. Scaroni, you've talked about the lack of desirability of holding non-controlling interests in listed shares, and I think the listed companies. I think we've seen the danger of announcing a sale ahead of that sale with your stake in Galp, which appears to be hurting from the hangover of those shares. Have you thought about that in the context of this transaction, sort of pre-announcing that? What was your thinking of the board when you looked at this overall transaction? The second question I have is, take your point about the buyback, which is welcome news. Can you also confirm something I think you've said before, is that there would be no change to the dividend policy as well subsequent to this transaction?
Well, answering to your question, I agree with you. To announce that you would be selling, particularly in the case of Galp, certainly does not help the share price. Frankly, we could not see any alternative to that. This position of ours has been held for a long time. We had to negotiate with public authorities in order to be able to sell. When you have a complex negotiation process, it happens that you have to announce what you are going to do. If we had not announced, somebody else would have announced in our place.
Frankly, I agree with you that there is no alternative. In the case of Snam, I have to tell you, I'm a little more confident because Snam is, if I may say so, it's a quasi bond. It's a company that shareholders buy for the dividend, for the solidity of the dividend, and this makes me think that probably this effect would be lower than in case of companies which are more on the market than Snam. Now, in terms of I've also to tell you that we have already received a number of unsolicited expression of interest from strategic investors keen to buy a stake in Snam, which means that there is a huge interest for this kind of investment. Well, in terms of dividend policy, we certainly confirm the dividend that we have already announced for 2012. Next dividend is what we announced it to be.
In terms of what we will do in our strategic review next year, well, this is another story. We will certainly introduce in our reasoning, a company which is different from what used to be. Less debt, more upstream, less regulated businesses.
Can I just ask a follow-up as well? Talking about share hangovers, there's been some discussion about a method that the Italian state or CDP would finance this, would be through some sale of your own shares. Has this been considered yet by the board, or has this been discussed by the Eni board to facilitate this process?
Listen, as you may remember, we have been holding 9.4% of our shares for a couple of years as the result of a buyback in 2002, 2003. Okay. We certainly will cancel these shares, in order to announce the new buyback program. Now, what the government and the Cassa Depositi e Prestiti will do with the stake they have exceeding the 30% is not really my business.
Right. Okay, thank you.
Thank you.
Next question comes from Miss Lucy Haskins from Barclays. Miss Haskins, please.
Thank you. Just a follow-on to that question. Given you were talking about reintroducing a buyback program, would you be tempted to buy that residual holding from CDP?
Excuse me. I have not understood. To buy what from CDP?
Effectively, if CDP is to sell down part of its interest in yourself to fund the acquisition of Snam, would that be something to buy from them as part of your buyback program?
No.
Sorry?
The answer is no. The answer is no.
Okay. Could I check, also the CGT rate on this transaction? What capital gains you may be subject to?
Well
Lucy, are you asking about the capital gains on the Snam transaction?
Yes.
For sure, the price that we have agreed with the CDP will make possible to realize a quite remarkable amount of capital gain, of course, we are targeting to be able to replicate more or less the same dimension when we'll approach the market. All in all, we expect to realize something close to in excess of EUR two billion on which we do not expect to face any significant amount of taxation because, of course, we are enjoying the participation exemption rules in Italy.
Sorry, could you tell me, this wouldn't be subject to?
Will be subject to a very limited tax rate. We can define it in the region of 1.5% on the capital gain that will be realized from the disposal.
That's great. Thank you. If I could just, one more sort of follow through. The price that you have achieved from CDP, are you going to use that as a floor for any other potential divestments or the remaining stake that you sell down in Snam?
No. The answer is no. There will not be a floor.
Thank you.
We will do our best.
Many thanks.
Next question comes from Mr. Stefano Gamberini from Equita SIM. Mr. Gamberini, please.
Good afternoon. Stefano Gamberini from Equita SIM, the utility side. Just two questions about the price. First of all, how did you calculate the RAB at the end of 2011, the RAB per share? Second, if you can share with us your assumption regarding the DCF valuation. Third question regarding the second point, the flexibility on disposal of the remaining stake. Do you have an idea when could be the best period to dispose, considering the regulatory period of distribution, which will end in a year, and transport that will end at the end of 2014? Many thanks.
Well, as far as the RAB, to which we have referred in determining, in sentencing, that we have been recognized a premium by 5%, you can refer, of course, to the normal calculation that is done in determining what normally is called the equity RAB. Starting from the enterprise value of the company, less the net debt of the company, adding what normally is defined the NPV of the incentive investment, considering also some provisions which reduce the amount of equity RAB, for example, environmental provision, pension provision, and some other minor provisions. If you consider those amounts relating to the 2011 situation existing at year-end, you will quite easily define, calculate the amount, and accordingly, the premium that we have been recognized.
In terms of discounted cash flow, which was one of the criteria to which we have referred during our negotiation with CDP, of course, it take into account what the company has announced for the next full year, the official information which has been publicly released, and considering a discount ratio equivalent to the weighted average cost of capital for a regulated business company. Ranging between 5% and 6%. As far as the flexibility with reference to the remaining stake, of course, in terms of timing, we are quite happy that the government has not imposed any specific deadline, considering that immediately after having transferred the controlling stake to CDP, our residual stake will have sterilized the vote.
Consequently, we will be able to maintain our stake up to when we will consider appropriate, or we will consider the market condition will be satisfactory for the disposal. Well, for sure, over the next few months and few years, the company Snam and the other controlling companies will have to meet the Italian authority in order to renegotiate the new regulatory period. We do not consider this event as a major event which can affect the timing of our disposal. We have not agreed any residual effect with the CDP as a consequence of any modification which could happen to all the regulatory framework. I repeat, we do not consider this event a major event affecting our disposal process.
Just a quick follow-up, if I may. As regards the evaluation of the company in the three different criteria, do you weight the different criteria with different weights during your calculation, or it was straight up an average of the three different prices, if I may?
We, as well as the advisors which has worked with us on this transaction, on top of the advisor assisting the board, you have to consider that there was also another advisor specifically appointed by the independent directors of the company, since the transaction is a transaction with a related entity. The criteria to which altogether we have referred in determining the most appropriate price refers not only to one or two specific criteria, but we have referred to a number of criteria. Starting from the most important, the most representative one, which was the DCF.
Of course, we have referred to the RAB existing either at the year-end and what it is expected to be when the closing will take place, plus another criteria to which we have referred towards the multiples for regulated business, or what has been already done in the recent past for similar type of businesses. All in all, the average of those criterias have confirmed the fairness of the price that we have agreed with CDP.
Many thanks.
Next question comes from Mr. Alberto Ponti from SG. Mr. Ponti, please.
Good afternoon. Just a quick one. Given that the payment is in three tranches from CDP to you, can you remind us when are you going to deconsolidate Snam so that we can start counting the grace period for the refinancing of Snam? Thank you.
Deconsolidation will take place as soon as the closing will take place. It will depend on when the condition precedent, the most important of which is the approval from the Italian antitrust authority, it will be received. However, we can position the closing date by the end of September, half of October, and at the closing, we will transfer the shares to CDP, and in that specific moment, we will not be any more the controlling entity of Snam. You can consider that the last quarter of 2012 will pertain to CDP because we will not be any more the controlling entity of Snam. From the 1st of October, it is reasonable to assume that Eni will not control any more Snam, and from that date onward, Snam has to start the repayment of their debt to Eni.
It's very clear. Thank you very much.
Next question come from Mr. Domenico Ghilotti from Equita. Mr. Ghilotti, please.
Good afternoon. I have a question on the treasury share cancellation. What is the timing for the approval and completion of this process?
The approval, what do you mean?
You said that you are considering a treasury share cancellation, so when do you expect to issue the proposal, and then the timing for the full effectiveness of the cancellation?
Just a second. We are going to call a shareholder meeting on the-
16th of July.
16th of July.
Okay.
This shareholder meeting on the 16th of July, I believe at 10:00 A.M., we will propose the cancellation of our buyback shares and the launch of a new plan of buyback. This new plan of buyback will last 18 months. It will be renewed at the successive shareholder meeting. As you may have read in our press release, our buyback will not start then after the presentation of our new strategy, which is likely to be end of February, beginning of March next year.
Okay. Thank you.
No more questions at the moment. Ladies and gentlemen, I'd like to remind you that if you want to register for your questions, please press star followed by one. To cancel the reservation, press star followed by two. Thank you. Next question comes from Mr. Paolo Cini from Intermonte. Mr. Cini, please.
Good afternoon. First question regarding Italgas. We have read a newspaper regarding potential antitrust problems. I'd like to have your view on this issue in particular. Second question regarding the TAG. Do you think that a potential merger between Snam and the TAG could be an interesting move for the CDP, creating potential synergies for the company? My final question is on the gas prices in Italy. I'd like to have your comment regarding the potential impact of this disposal of Snam on gas prices.
Listen, I'm afraid you asked three questions that I cannot answer, either one of those. As far as the first one around Italgas, I just want to tell you that as far as we are concerned, whatever the antitrust decides on Italgas, we are immune from any consequence. This is not our problem. If it is a problem, it is a problem of Cassa Depositi e Prestiti. As far as TAG is concerned, again, we don't know much about it, and frankly, we don't want to investigate much more on something which is not at the center of our interest. As far as the gas price is concerned, if I may suggest you to ask the government their view about that, because this looks like having been the motivation of all this decision.
Frankly, I believe that Cassa, and possibly the Italian government, are better placed than us to give you an answer on the gas price.
No more questions at the moment. Next question comes from Mr. Neil Morton from Berenberg. Mr. Morton, please.
Yes, thank you. I don't know whether this is a question for CDP or for yourselves, clearly you were negotiating with them, and I'm sure their sort of ability to pay must have been a matter of debate. We had heard in the press various stories about, as has been mentioned previously, cancellation of treasury shares, CDP selling a stake, or selling down the stake to an outside buyer. Basically, are you happy that CDP are good for the payout money? Thank you.
I'm not sure I understood the question. Are we happy with the money they're paying to us?
No.
No.
Just in terms of their ability to raise funds to pay you.
CDP is a very rich institution, frankly, we are not worried about the fact that they will be paying what they signed to pay. Frankly, I could hardly imagine a better buyer in terms of being safe and relaxed about the payment. As far as their decision to sell any shares in excess of the 30% they hold, frankly, I don't know what they will be doing. This is really a question for them.
Okay, that's fine. Thank you.
Next question comes from Mr. Mark Bloomfield from Deutsche Bank. Mr. Bloomfield, please.
Good afternoon. Thanks for taking my question. I appreciate that you'll give us a better sense of the new financial framework come February, March next year. I just wondered, in order to help us better understand the level of distributions or potential distributions going forwards, could you perhaps offer some comment on what you think is a sensible pro forma gearing range for the company, ex-Snam, and perhaps also give us some kind of framework under which you would actually consider buying back stock? Not just the fact you're going for an approval, but what kind of scenarios would you consider buying back? Thanks.
Listen, you are asking a very appropriate question, I have to tell you, because we have in front of us a major change in our balance sheet in the next 12, 15 months or so. There is not only this Snam transaction, but also the GALP transaction, which we are looking at. On the other side, the quite impressive amount of discoveries that Eni has been achieving in the last years and months will give us a lot of room for internal growth and CapEx in the next 10 years or so. Yes, we will be working on a detailed plan, we take into account, of course, CapEx, dividend distribution, share buyback, but also the level of leverage that we want to have.
More generally, since we are not ready to answer your question, although we will be, because this is a crucial issue for us, but generally speaking, I believe that an upstream company like us, which has so much portfolio of new discoveries, needs to have a strong balance sheet, because we sell around the world our balance sheet, and my general view is that we certainly want to have in the future a much lower gearing than we have been having in the past few years.
Thank you.
No more question at the moment. I'd like to remind you that if you want to re-access all your questions, please press star followed by 1. To cancel the reservation, press star followed by 2. Thank you. The control room confirm there are no more questions.
Thank you. In that case, we can call the analyst and investor conference over.
Thank you, ladies and gentlemen. The investor and analyst call now is over. The press conference will start shortly, so journalists should stay online. Ladies and gentlemen, welcome to our press conference. To ask questions, please press star followed by one. To cancel the reservation, press star followed by two. [Non-English content] . No more question.
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Ok.
Next question comes from Mr. William Kennedy from Bloomberg. Mr. Kennedy, please.
Good evening. You mentioned that you'd already had some approaches for the remaining 20% of Snam. I wondered if you could give some details of the types of buyer who are interested and whether they are interested in the entire 20% or a portion thereof. Thank you very much.
Based on the informal contact and informal approach that we have received so far, we don't want to disclose any specific percentage which we could be in a position to place on a bilateral negotiation basis. For sure, what we can confirm so far is that there is a strong interest, even for an interesting remarkable percentage of Snam stake. Of course, our first goal that we want to achieve over the next few weeks is to start to verify, to check whether or not those demonstration of interest are founded or not. So far, we are extremely positive about what could come out from the negotiation with those entities. Some of them have also already disclosed potential interest for a double-digit percentage. This is the reason why we are so positive about this strategy.
Just to quickly follow up, would you expect to do a deal this year, do you think?
Would we expect, excuse me?
To do a deal for that 20%. It sounds like there's a lot of interest. Would you expect to do a deal this year? Is that possible?
Well, as already stated by Mr. Scaroni, we have been successful in not having a specific deadline for the disposal. Of course, our goal is to monetize as soon as possible, of course, we don't want to destroy value. We want to maximize value. Of course, the timing will be significantly influenced by the prevailing market value of Snam shares. It will depend on that.
Yes, to answer your specific question, it is quite unlikely that Snam has one buyer for 22%, because we own 22%. I think it is going to be very unlikely. In any case, our North Star in all what we will be doing will be to maximize value from our stake.
Okay, that's clear. Thank you, gentlemen.
Next question comes from Mr. Liam Moloney from Dow Jones. Mr. Moloney, please.
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If there are no more questions, we will close the press conference.
[Non-English content]. The control room confirm there are no more questions.
Thank you.
Thank you. Thank you.
Bye.
Bye.