Octopus Energy lines up sale of stake in $10bn software arm Kraken

Octopus Energy has lined up a syndicate including D1 Capital Partners, Fidelity and an arm of Ontario Teachers to buy a 10–20% stake in its software arm Kraken Technologies in a demerger-backed sale likely valuing Kraken at $9bn–$10bn. Goldman Sachs is handling the transaction, which, if priced at $10bn, would imply the wider Octopus group is worth roughly £15bn; Kraken is contracted to over 70m customer accounts with a target of 100m by 2027 and its platform is licensed to major utilities worldwide. The deal both crystallises a sizeable private-market valuation for a fast-growing energy-software asset and aims to remove perceived conflicts of interest to accelerate third‑party licensing and future growth/exit options.

Analysis

Market structure: Kraken's demerger and a $9-10bn valuation crystallises a winner-takes-most dynamic in energy OSS — Kraken, its licencees (EON, EDF, Origin) and incumbents that adopt its stack win via lower OPEX and faster product rollout; legacy meter/billing vendors and vertically integrated retail suppliers that monetise captive data are the losers. A standalone Kraken removes conflict-of-interest, likely accelerating licensing deals and pricing power for SaaS margins (target EBITDA margins >25% by 2027 implied by current multiples).

Risk assessment: Key tail risks are regulatory intervention on data/use (UK/EU privacy and competition) or a large operational outage that damages incumbent trust; macro tightening could compress multiples (a 200–400bp higher real yields could cut comparable private valuations by 20–30%). Immediate move risk: announcement-driven sentiment in days; short-term (weeks–months) execution risk around syndicate close; long-term (to 2027) execution risk around hitting 100m accounts. Hidden dependency: Kraken revenues scale with customer meter read frequency, utility capex cycles and successful deconfliction from Octopus. Catalysts: formal demerger filing (30–60 days), major 10–50m account licence win, or IPO roadmap (12–24 months).

Trade implications: Direct: establish a 1–2% notional long in GS (ticker: GS) via a 9-month call spread to play advisor fees and M&A flow (buy 10% ITM / sell 30% ITM) before deal close (act within 1–4 weeks). Take a 1–2% overweight in ITRI (Itron, ticker: ITRI) or similar grid-software public names (or buy 18-month LEAP 35–45% OTM) to capture secular adoption. Private-secondary: participate in Kraken secondary only if valuation ≤$10bn — limit to 1–3% NAV with 18–36 month hold and 20%+ IRR hurdle. Hedge: buy 6-month 5%‑delta puts on Shell (ticker: SHEL) sized 0.5–1% NAV to guard vs retail divestiture/earnings risk.

Contrarian angles: Consensus underweights execution risk and margin pressure from rapid international rollouts; $10bn prices 5–7+ years of premium growth — if Kraken misses 2027 100m target by >20% the re‑rating could be 30–50%. Historical parallel: platform carve-outs (e.g., SAP/Concur) show initial premium then mean reversion once growth normalises; demerger may free customers but also exposes Kraken to sales cycles and procurement scrutiny, slowing near-term revenue recognition. Maintain downside hedges until the first post-demerger quarterly contract cadence is visible (2–3 quarters).

Key Decisions for Investors

• Establish a 1–2% notional long position in Goldman Sachs (GS) via a 9-month call spread (buy ~10% ITM call / sell ~30% ITM) within 1–4 weeks to capture advisory/M&A fee upside from the Kraken stake sale.
• Initiate a 1–2% overweight in Itron (ITRI) or comparable grid-software public exposure; preferred execution: buy 18-month LEAP calls ~35–45% OTM or 1–2% direct equity to play SaaS adoption.
• If access available, participate in Kraken private-secondary at valuation ≤$10bn with size capped at 1–3% of NAV, targeting 18–36 month hold and a >20% IRR (decline participation if price >$10bn or lock-up >24 months).
• Hedge sector/retail-risk by buying 6-month, ~5%‑delta puts on Shell (SHEL) sized 0.5–1% NAV, or initiate a 0.5% short notional in SHEL if risk appetite higher, to protect against retail divestiture/earnings downside.
• Rebalance sector exposure: over next 30 days trim 1–2% from legacy utilities/IT vendors with >50% revenue tied to on-prem billing systems and rotate into energy SaaS/renewable-enablers until two post-demerger quarters validate Kraken contract cadence.