Even if bidders close a deal, the troubled French state-owned nuclear firm could still be short in terms of capital requirements

Financial wire services have been breathlessly reporting all week the expected bids for Areva’s reactor division. The most credible report is that the Electricite de France SA (EDF) will offer 2 billion euros. The non-binding offer will set off a lumbering process of bureaucratic bean counting as both EDF and Areva are creations of the French government. More than 85% of the shares of both firms are held by the government.

The negotiations, if you can call them that, will be more of a case of a hostile takeover than an acquisition as EDF will have to decide which parts of Areva’s workforce it wants to keep. According to French English language media reports the deal would include Areva’s reactor division, which employs 15,000 people worldwide and a much smaller engineering division reported to employ 1,200 people. The deal would not include Areva’s uranium mining, enrichment, and nuclear fuels operations.

Other parties interested in buying slices of the business include GDF Suez, now called Engie, which is interested in Areva’s nuclear maintenance and services operations. This low risk cash rich business also has the interest of two of China’s major nuclear firms. China National Nuclear Corp. (CNNC) and China General Nuclear Power Group (CGN) are interested in the service business and also in Areva’s digital nuclear control room systems.

In 2014 Areva completed the technical details of a $15 billion spent fuel reprocessing plant to be built in China in cooperation with CNNC.  FInancial terms have not yet been set.

Separately, both Chinese firms are expected to be equity investors in the UK Hinkley Point project which is expected to be built with two Areva 1600 MW EPR reactors. The Chinese firms are planning to take a combined stake of at least 30% of the project. In return they want the UK to buy engineering services and nuclear reactor components from them.  Negotiations for the equity deal are ongoing.

If EDF buys Areva’s reactor division it will most likely ask the government to take over the debt and other pending liabilities associated with two troubled reactor construction projects.  A reactor under construction in Finland is years behind schedule and billions over budget. It is mired in multiple disputes over costs with Siemans and with the Finnish utility which is the customer for the reactor project.  Similar problems in terms of cost over runs and schedule delays have plagued an EPR reactor project in France.  Taken together Areva recorded a loss in 2014 of 4.8 billion euros.

Even if the EDF deal goes through, and the debts are sequestered in a separate financial bin, Areva still will need at several billion euros to re-enter the global reactor market. Assuming the French government is willing to recapitalize the firm, it will need to complete two EPR reactors currently under construction in China, on time and within budget, to convince future customers that the design is not too complicated and too costly to build.

Areva must also face a divided French government with policy positions of some of the principals convoluted by past domestic arrangements. The wildly unpopular French President Francois Hollande, in a politically expedient deal with Greens to keep his parliamentary majority intact, has promoted a plan to reduce France’s reliance on nuclear energy by 25%. However, Segolene Royal, the Energy Minister, wants to retain Areva’s nuclear capabilities as a national asset.  France depends on nuclear energy for 75% of its electricity.  Hollande and Royal have four children together despite having never married, but split apart in 2007 over an affair Hollande had with a journalist.

Both are formidable players in French politics and neither is likely to give much ground to the other’s position on nuclear energy.  For her part, Royal has taken a wait-and-see position regarding funding new capital for Areva. The current takeover by EDF, if successful, may provide enough closure for her to move ahead with support for the money.

In terms of regaining traction in global reactor markets, Areva has no prospects for construction of EPRs in the US and was aced out of a deal to build two units in Jordan.  Vietnam, which recently pushed back the start of construction of eight reactors by several years, will get its technology for the first four units from Rosatom and the next four from Japanese firms. South Africa and the Czech Republic are scheduled to release tenders for multiple new reactors within the next 12 months. However, both countries are looking for significant equity participation by vendors and neither country has yet committed to guaranteed rates to support pay-as-you-go methods to cover construction costs.

Turkey plans equity stake in Sinop project

While Areva waits for the auctioneer’s gavel to fall in Paris, over in Turkey the country’s state-owned nuclear utility, Elektrik Uretim (EUAS), is reported to be planning to take a 49% stake in the Sinop project on the Black sea coast. The good news for Areva is that it is partnered with Japan’s Mitsubishi to provide four 1,100 MW Atmea reactors for the project.

The current run up of equity partners for the 4,800 MW power station includes a 65% stake by a consortium of Mitsubishi, Itochu, Areva, and GDF Suez.  EUAS has the other 35% of the project. That would change with EUAS taking a 50% stake and then turning around to offer shares to private investors. This deal would reduce Areva’s cash requirements for the project while also providing some much needed revenue. Construction is expected to start in 2017.

Elsewhere in Turkey, Rosatom has broken ground for construction of four 1,200 MW VVER reactors at Akkuyu in Mersin on the Mediterranean seacoast. Russia is providing 100% of the financing for the project, but after 15 years of operation, at guaranteed rates, up to 49% of the shares in the power station will be offered to private equity investors.

Turkey’s plans for a third nuclear power plant, expected to be located on the Black Sea coast north of Istanbul, may be built by a consortium of Westinghouse and China’s State Nuclear Power Technology Corp. (SNPTC). Negotiations are underway with the Turkish energy ministry for a four reactor power station. The plan, as reported by WNN, is to supply four Westinghouse 1150 MW AP1000 reactors along with all operations, nuclear fuel services, maintenance, engineering plant services, and, eventually, after 60-80 years, decommissioning.

Financing arrangements and the exact location of the power station have not be set. No date has been given by EUAS for start of the project.

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