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EUROPE'S UTILITY COMPANIES FEEL THE HEAT OF CONSOLIDATION
By Rebecca Bream, Leslie Crawford, and Richard Milne

Financial Times (UK)
September 6, 2005

http://news.ft.com/cms/s/378e3564-1f00-11da-94d5-00000e2511c8.html (subscribers only)

With the announcement of Gas Natural’s bid for Spanish rival Endesa and the prospect of Eon bidding for Scottish Power in the U.K., utilities companies across Europe are bracing themselves for a new wave of consolidation.

A clutch of major power players are likely to emerge as continental markets are liberalized and state-owned providers such as Gaz de France are privatized. Analysts suggest that in five years’ time the European utilities sector will be dominated by a handful of large companies such as Eon and RWE from Germany, Enel of Italy, GdF and EDF of France, and possibly a combined Gas Natural and Endesa in Spain.

However, Gas Natural’s hostile bid for Endesa, Spain’s largest electricity group, on Tuesday ran into a barrage of criticism, highlighting some of the obstacles in the path of consolidation. Analysts, former regulators, smaller Spanish utilities, consumer groups and opposition politicians all voiced doubts over the bid, even before Endesa’s board voted to reject it.

Luís Urquijo, an analyst at Ahorro Corporación, a Spanish brokerage, said: “The premium Gas Natural is offering will not satisfy investors, particularly when you consider that Gas Natural wants to finance the acquisition by selling about 20 per cent of the combined company’s net assets.”

Mr. Urquijo believes foreign institutional investors, who own about half of Endesa, will hold out for a better deal, although Gas Natural, which wants to absorb a company twice its size, may have little room to improve its offer.

Endesa’s shares rose 8 per cent on Tuesday to close at 20.61 euros, only 3 per cent below Gas Natural’s cash and shares offer, which valued Endesa at 22.5bn euros ($28.2bn), or 21.3 euros per share. Rafael Villaseca, Gas Natural’s chief executive, on Tuesday said the offer was final.

The takeover bid is subject to regulatory approval, and as such, it will be the first real test of the year-old Socialist government’s commitment to promoting competition in the Spanish energy markets.

But opposition politicians are already denouncing a stitch-up. Eduardo Zaplana, the Popular party spokesman in parliament, said on Tuesday: “The government will wave this deal through to pay off political favors.” Gas Natural was twice thwarted in its attempts to acquire Iberdrola, Spain’s second largest power group, when the Popular party was in power. The Socialist government, however, views national energy champions more favorably.

Before asset sales, a vertically-integrated Gas Natural-Endesa would command close to 40 per cent of power generation in Spain and about 80 per cent of the gas market, in addition to power plants and gas interests in Latin America, Italy, and France.

Mr. Villaseca on Tuesday insisted that the takeover should not raise regulatory concerns. “Endesa has only 4 per cent of the Spanish gas market, while Gas Natural has just over 3 per cent of the electricity market. The two companies are complementary, not competitors,” he said.

The most controversial aspect of the takeover concerns Gas Natural’s separate agreement with Iberdrola, for the sale of 7bn to 9bn euros worth of assets following the acquisition of Endesa.

Under the deal, Iberdrola would acquire about 20 per cent of Gas Natural’s retail business, some of Endesa’s generation plants in France and Italy, some coal-fired power stations in Spain, and perhaps some of Endesa’s power plants in the Balearic and Canary Islands, according to Mr. Villaseca.

“Gas Natural and Iberdrola have effectively agreed to carve up Endesa between them,” says Mr Urquijo. “It’s a fantastic deal for Iberdrola, but it is really a veiled joint bid for Endesa,” he said. Mr. Urquijo estimates that Iberdrola would end up with about 20 per cent of the net assets of the combined Gas Natural and Endesa.

Although Gas Natural says the bilateral deal was negotiated to mitigate regulatory concerns, it has nevertheless come under fire from former regulators and other market participants as a naked attempt by the two companies to carve up the gas and electricity markets between them.

The sale would give Iberdrola a head start in the lucrative gas distribution business, which used to be a Gas Natural monopoly until its recent liberalization. But by negotiating exclusively with Iberdrola, Gas Natural has laid itself open to accusations of damaging the business of competitors, in particular Unión Fenosa, Spain’s third-largest utility, which has been investing heavily in Egypt to become a major gas supplier in Spain.

Unión Fenosa was yesterday understood to be furious at being shut out of Gas Natural’s cozy deal with Iberdrola, although the company officially declined to comment.

A former Spanish anti-trust official said on Tuesday: “The deal between Gas Natural and Iberdrola is a huge mistake. It is worth nothing until antitrust regulators review the proposed take-over of Endesa. It is up to the competition authorities to decide which assets should be placed in a blind trust, and then auctioned. The authorities won’t like the fact that Gas Natural and Iberdrola have tried to cook up a deal before they have had their say.”

Elsewhere in the European energy market, the U.K. is already dominated by foreign companies such as RWE, Eon, and EDF Energy, and it is unclear whether any U.K.-listed groups will survive the next phase of consolidation.

Centrica, the U.K.’s largest utilities company, is the subject of takeover speculation and has been linked to Gaz de France. “It is a trophy asset for anyone wanting to break into the U.K. market,” said one analyst.

The current round of projected deals were more about using up excess cash than making cost savings, although some economies of scale were possible, said another London-based analyst. “Executives prefer to do deals than give cash back to shareholders,” he said.

Smaller utilities groups may band together in defensive mergers to avoid being swallowed up as European energy markets are liberalized. A senior German energy executive said: “Companies are now saying ‘Either I do a merger now to strengthen my position or I will become a takeover candidate when the markets open in 2007.”