AES Corp To Vend Philippines Business For $1.1 Billion

The AES Corporation (NYSE:AES) has recently inked a deal with SMC Global Power Holdings Corp., under which the company will divest its Philippines business to the later for $1.05 billion. The divestment is scheduled to be completed by the first half of 2018, subject to regulatory approval by the Philippine Competition Commission (PCC).

Details of the Deal

In particular, AES Corp will sell its 51% stake in Masin-AES Pte. Ltd — a subsidiary that owns its business interests in the Philippines — to SMC Global Power. The terms of the transaction include divestment of AES Corp’s interest in the 630 megawatt (MW) Masinloc coal-fired plant, the 335 MW Masinloc 2 coal-fired plant (under construction) and the 10 MW Masinloc energy storage project (onstream).

Notably, SMC Global Power will take-over the remaining 49% equity interest in the subsidiary, which is held by Thailand’s Electricity Generating Public Company Limited (EGCO Group), for $850 million.

How Will AES Corp Benefit?

AES Corp aims to use the proceeds from the divestment to pay down debt, which in turn will allow it to achieve investment grade metrics in 2019 — a year earlier than expected. The company also boasts the goal of attaining investment grade ratings by 2020, to which this deal will contribute substantially.

A poor investment grade rating may restrict a company’s ability to obtain necessary finance to fund its new projects or expand the existing ones. So a good investment grade rating is always desirable and the latest Masinloc deal will help AES Corp to duly achieve that.

Notably, AES Corp is well known for streamlining its portfolio through asset divestments and by exiting markets and businesses where it does not have or cannot develop a competitive advantage. The company follows a strategy of reducing complexity and portfolio simplification through withdrawal of operations in the markets that carry certain risks.

To this end, before deciding on the vending of the Philippines business, in April 2017, AES Corp completed the sale of its combined heating and power coal plants in Kazakhstan, for net proceeds of $24 million. In the same month, DP&L and AES Ohio Generation entered into an agreement for the sale of DP&L’s undivided interest in Zimmer and Miami Fort for $50 million in cash.

In September, the company sold out 5% of its Dominican Republic business for $60 million to Linda Group, an investor-based group. This transaction resulted in a net increase of $25 million to the company’s additional paid in capital and non-controlling interest, respectively.

During the third-quarter earnings call, AES Corp announced plans to significantly upgrade its asset sales program, to enhance focus on core markets. In line with this, management aims at realizing $2 billion in proceeds during 2018-2020. Now, with the finalization of the Masinloc divestment, the company will be able to gain $1 billion of this, by 2018-end.

Considering its trend of divesting assets to consolidate operations and in a bid to achieve the aforementioned target of $2-billion realization from sales proceeds, we except to witness more such divestment decisions from AES Corp.

Price Performance

AES Corp's stock has lost about 7.5% over a year, comparing unfavorably with the broader industry’s gain of 9%. The underperformance might have been led by unfavorable factors, such as devaluation in foreign currencies, higher interest and inflation rates in Brazil and hurricanes in the Caribbean Islands.

Zacks Rank & Key Picks

AES Corp currently has a Zacks Rank #4 (Sell).

A few better-ranked stocks in the same space are Atlantic Power Corporation (NYSE:AT) , DTE Energy Company (NYSE:DTE) and Consolidated Edison Inc. (NYSE:ED) . You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

Atlantic Power delivered an average positive earnings surprise of 29.21% in the past four quarters. The Zacks Consensus Estimate for current-year loss has narrowed by 5 cents in the past 30 days.

DTE Energy posted an average positive earnings surprise of 3.81% over the last four quarters. The Zacks Consensus Estimate for the current-year earnings has improved by 12 cents in the past 60 days.

Consolidated Edison reported an average positive earnings surprise of 0.06% in the past four quarters. The Zacks Consensus Estimate for the current-quarter earnings has improved by 3 cents over the last 60 days.

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