Sempra Energy on Monday sold a majority stake in its fast-growing commodities trading business to Royal Bank of Scotland Group for $1.35 billion, a move that limits risk for Sempra and gives the bank a foothold in the recently lucrative business of buying and selling oil, natural gas and other commodities.
The deal creates a joint venture between the two companies and frees more than $1 billion of San Diego-based Sempra's investment in the commodities operation. Instead, Sempra, which also owns utilities Southern California Gas Co. and San Diego Gas & Electric Co., said it would spend the cash raising shareholder dividends and buying back shares of its stock.
"It looks like they have substantially reduced the risk associated with that business, while retaining a substantial interest in it," said Paul Patterson, an analyst who follows Sempra for Glenrock Associates in New York.
Banking giant RBS, based in Edinburgh, adds financial heft, access to new markets and a stronger credit rating to the commodities venture, to be renamed RBS Sempra Commodities. Apart from its equity investment, RBS would provide any additional capital needed for operations and expansion, Sempra said.
Sempra would keep $1.3 billion invested in the commodities venture -- with an option to add $200 million more. The company would split the earnings from the trading company based on profitability and a formula that initially yields disproportionate benefits to Sempra, then gives 70% to RBS after earnings pass a certain benchmark.
Sempra had been struggling to keep up with the growth and investment needs of its commodities business. The trading operation, founded in 1997 with 100 employees, now has a payroll of 850 and was Sempra's most profitable business in 2006, providing 46% of the company's operating earnings and 36% of its net income for the year.
"The business had so many opportunities, and it was growing so fast ... it was just outgrowing its residence within the Sempra household," said Donald Felsinger, Sempra's chairman and chief executive. "We're going to have a new company that, with the financial might of RBS, is going to be competing in the marketplace with the likes of Goldman Sachs and Morgan Stanley."
Analysts noted that earnings from Sempra's trading operations were unpredictable and potentially volatile because they reflected financial bets made on the gyrating prices of commodities such as oil, gasoline, natural gas and metals.
"I think they were getting a little uncomfortable with the fact that commodities had become more than 40% of their operating earnings," said Michael Heim, utilities analyst at A.G. Edwards & Sons Inc., which rates Sempra shares a "buy." With the joint venture, "they are significantly reducing their risk profile."
Because of the joint venture, Sempra lowered its earnings estimates for 2008 by 20 cents a share to a range of $3.65 to $3.85. The company's guidance for 2007 remained the same, at $3.75 to $3.95 a share.
The company said it expected to complete the joint venture transaction by the end of the year and would then begin buying $1.5 billion to $2 billion worth of Sempra shares.
Shares of Sempra rose $1.44 on Monday to $60.74.