In-demand Harmony Energy heads to auction in investment trust first

After a bidding war for Harmony Energy Income reached a stalemate, the battery storage trust will be auctioned off.

Harmony Energy Income (HEIT ) is taking its portfolio of battery storage assets to auction in an investment trust first to break the impasse created by the bidding war between Foresight Group and Drax (DRX).

The £212m fund has found itself at the centre of a tussle between funds owned by Foresight Group and listed power generator Drax that has seen its share price climb nearly 50% this year. The fund’s discount, which has average nearly 35% over 12 months, has been erased and replaced by a 3.2% premium.

After an initial bid from Foresight, Drax offered 88p a share, equivalent to £200m, which the HEIT board backed. However, allegiance switched to Foresight Bidco, a vehicle set up by a group of Foresight Group funds, after it made a superior offer of 92.4p per share, or £210m for the portfolio.

A meeting was convened by HEIT to approve the Foresight offer for 30 May, with an ‘indefinite adjournment’ of the shareholder meeting to approve the Drax offer.

However, since then, neither Drax nor Foresight has declared their offers final, meaning that either offer may be increased or revised. That means ‘a competitive situation continues to exist’, said the HEIT board, which is chaired by Norman Crighton.

The board is now in negotiations with the Takeover Panel, Drax and Foresight in order to ‘agree an orderly framework for the resolution of this competitive situation’ that will see them take part in an auction process of up to five rounds on 21 May.

All of the parties have agreed to the terms of the auction, although if either Foresight or Drax makes a ‘no increase’ offer before 5pm tomorrow, the auction will not go ahead.

Deutsche Numis analyst Andrew Rees said this was ‘the first time we can remember where the takeover of an investment company will be settled by an auction process between two competing parties’.

As Drax has not made a ‘no increase’ statement on its 88p bid it ‘looks set to engaged in the proposed auction’, said Rees.

‘Interestingly there is no requirement for an increased bid to be higher than the other offeror’s bid, therefore a possible round one bid from Drax would be to match Foresight’s 92.4p,’ he said.

Shares in HEIT have been trading ahead of the 94.2p Foresight offer over the past month, pointing to expectations that Drax would come back with a higher offer.

‘Shareholders will now have to wait for a conclusion to a sales process that started almost a year ago,’ said Rees.

‘We expect this is an outcome that few would have thought plausible at the time, when shares were trading at 47.8p and operational free cashflow was scarcely covering debt service costs.’

Peel Hunt analyst Markuz Jaffe said the auction should ‘hopefully bring the competitive bidding process to a conclusion, while also potentially helping to justify the share price activity’ that has pushed the shares to 96p.

HEIT was trading 0.5% higher at 96.6p on Monday afternoon.