Europe's biggest economy has already been a magnet for infrastructure investors in recent years, attracting the likes of Australia's Macquarie, Europe's top insurer Allianz and the world's largest reinsurer Munich Re. Prime targets included large high-voltage power and gas grids - so called transmission system operators (TSOs) - which transport power or gas over long distances and offer returns on equity guaranteed by the state.
Infrastructure investors and pension funds have spent about 6.3 billion euros ($8.3 billion) on these assets in recent years. But with most of those TSOs already sold, mainly due to regulation that forced the country's top utilities to divest them, investors are beginning to eye smaller and more regional distribution system operators, or DSOs.
"It can be an interesting asset class for investors. Some have already shown interest in buying DSOs," said Ralph Drebes, a partner at law firm Linklaters specialising in private equity and M&A transactions. Drebes said he expected transactions in the sector as many investors seek stable returns over high-risk asset classes such as equities, commodities and emerging market bonds.
A key appeal of these power networks is that the industry regulator has set relatively high guaranteed returns as a way of attracting investment into the sector. "Given historically low bond yields, investors are crying out for ways to generate visible returns. These assets potentially offer such an opportunity," said Alastair Bishop, fund manager at BlackRock, the world's largest money manager.
German grid regulator Bundesnetzagentur has set the pretax return on equity (ROE) for gas and electricity networks at 9.29 percent and 7.56 percent, respectively, as part of its effort to attract infrastructure investors. Those rates change to a 9.05 percent flat ROE starting January 1, 2013, for gas networks and January 1, 2014, for electricity.
This may be lower than the 12.5 percent pretax ROE - defined as pretax profit divided by shareholder equity - achieved by around 500 of the biggest companies in the euro zone, according to latest data from researchers StarMine, but returns on grid investments are guaranteed by triple-A rated Germany and are not subject to market volatility.
Grid investments also beat stable government bonds. Yields for two-year German bonds, for instance, have of late regularly moved into negative territory, meaning investors buying the assets are actually paying for the privilege of parking their money in a safe haven. So where do DSO deals look most attractive? Potential deals will likely focus on operators around large German cities and with more than 100,000 customers, two sources familiar with such deals said, adding the value of acquisitions could range from 250 million euros to 1 billion.
Bidders could include companies that have already participated in TSO auctions, including Macquarie, Allianz and Munich Re. Munich Re for instance was part of consortiums buying Open Grid Europe (OGE) from Germany's top energy group E.ON, as well as electricity TSO Amprion from the country's No 2 utility RWE. "We could invest principally (on our own), but given the fact that we are already invested in Amprion and Open Grid Europe, this is not our focus," said Holger Kerzel, a managing director at Munich Re's asset management unit MEAG.