Analysis: Empower deal with Palm District Cooling

Empower CEO Ahmad Bin Shafar explains the reasons for the merger

Target practice: Empower's $500mn purchase of Palm District Cooling may not be its last.
Target practice: Empower's $500mn purchase of Palm District Cooling may not be its last.

In the week after Empower created the world’s biggest district cooling network in terms of capacity, following its $500mn acquisition of competitor Palm Utilities and Palm District Cooling, its CEO Ahmed bin Shafar is already talking about the next one.

Despite the fact that the merger cut the number of major players in the UAE’s district cooling market form four to three – Tabreed and Emicool are the other remaining firms – Bin Shafar indicated that he felt there was room for more consolidation.

“Frankly speaking, Dubai does not need more than one company in district cooling,” he said.

“District cooling is not a multiple way of building platforms.

“It is unified forms. So basically, if we opened it up for everybody we’d never get the benefit of efficient service and significant savings.”

This is the rationale behind the deal announced in late January for Empower to pay $500mn for Palm Utilities and Palm District Cooling. The companies were sold by Istithmar World – an investment arm of Dubai World, and largely served communities developed by Dubai World-owned developer Nakheel such as Palm Jumeirah, Discovery Gardens and Ibn Battuta Mall, among others.

Prior to the deal, Empower was already the market leader in the sector, with a 38.6% market share, according to a 2012 Frost & Sullivan report. The combined entity will add Palm’s 20,000-strong customer base to Empower’s existing 25,000 and give it a market share of around 70%. It also gives it a combined capacity of 1mn refrigeration tons.

Bin Shafar said that the deal makes sense from both an operational and financial point of view, and added that he felt it could create synergies that would lead to savings of around $12.25mn (AED45mn) a year.

He believes that Empower is operationally stronger and can bring benefits just by rolling out its own working methods, but also said that some of the savings would come through redundancies.

“This is normal in any acquisition or takeover or merger,” he said.

“If we keep the same number there is no synergy.”

He also argued that the bigger entity can claim better rates from contractors, equipment manufacturers and suppliers “because we have the volumes”.

He dismissed concerns over a lack of competition in the market, stating that prices and terms for district cooling customers are set by the Supreme Council of Energy.

The deal has been financed through a new, $600mn syndicated loan agreed this week between four banks (see page 9). Empower also agreed a $142m loan with Doha Bank back in October 2013.

Bin Shafar said the new syndicated loan actually reduces the overall cost of capital for the combined entity, but declined to reveal loan terms.

“We don’t want to talk about it now – we will talk about it later.

“Empower has a very good financial position,” he added. “And we still have an appetite to acquire another business.

“I’m just waiting for the green light to come from the top and believe me within six months I will take it.”

“There are two companies left,” he said, when discussing potential targets. “Either/or… one of them”.

The new syndicated loan has been stretched over a seven-year term with annual repayments of around $110mn (AED400mn) due each year. Given that the company only generated a net profit of $51.7mn on revenues of $190.9mn (AED701mn) last year, he still showed little doubt of being able to service this.

For instance, he expects a restructuring within 3-4 years as the business consolidates, and secondly he believes that the combined entity will be a much bigger beast by then.

Although 2013’s figures are not due to be announced until mid-February, he said that the firm will achieve “double-digit” growth. He also said that he expects profits for the enlarged group in 2014 to reach around AED400mn ($110mn) on turnover of AED1.5bn ($408mn).

The remainder of its bank debt will be invested in organic growth projects such as new plants and deployed over the next couple of years. The company is currently building its second district cooling plant in Business Bay, which will serve an area of around 12km and add 80,000 refrigeration tons to its capacity. It is being built by Transgulf ElectroMechanical and should be commissioned by May.

“There is another one coming but I cannot announce the name of the project. It will be disclosed by the government of Dubai in March or April. It is close to Business Bay,” he added.

In total, he expects Empower to add a further 5-6 plants organically to its current portfolio of 57 over the next couple of years and said that these will largely be focussed on Dubai, which is where he believes the greatest opportunities exist.

“It is the hub of everything,” he said, adding that he is not currently looking at adding any plants in Qatar or Saudi Arabia because the decision-making process is slower abroad.

“The culture in Dubai is much easier and our strength is in Dubai.”

The two firms will continue to be run as separate entities for two years to see out existing contracts and supply deals, but operational changes to bring about business improvements began last November – two months before the deal was announced.

Bin Shafar acknowledged that some elements of the acquired company’s customer service needed improving, not least its billing.

“I’ve heard from a lot of customers – a lot of friends.

“They are not happy with the service they have because sometimes they get average bills. We are trying to resolve this issue, but I don’t have a magic stick.

“I need six months at least to solve all of them. We are trying to expedite the crucial things first.”

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