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European consolidation to continue

GAS AND power companies in Europe will continue expanding across the continent this year, although mergers and acquisition (M&A) activity is unlikely to reach the heady levels seen between 1997 and 2002.

A recent survey of over 100 senior executives from utilities in 19 European countries by PriceWaterhouseCoopers* finds that nearly two-thirds of respondents plan to expand their operations in western Europe and more than half of them plan to expand in central and eastern Europe.

However, consolidation will generally be in the form of smaller deals than the mega-mergers seen of the past few years and will tend to involve regional gas and electricity companies. Some opportunities are also expected to arise from the planned privatisations of Gaz de France and Electricité de France.

It is less certain how much interest there is among established utilities in buying stakes in eastern European firms that are due to be privatised, the survey finds.

A significant proportion of respondents also said they were looking beyond Europe for expansion. Almost one-fifth cited North America as a target and although this is a lower amount than in the previous year's survey, the financial weakness of US utilities and low stock values means there is significant potential for expansion by European companies in the US.

There is not much interest in the other direction. A separate survey of US utilities finds, perhaps unsurprisingly, that only 8% of respondents are looking at making acquisitions in Europe.

The survey says depressed energy markets and financial crises mean few European utilities have an interest in acquisitions in South America. There are signs of an increased interest in certain parts of Asia-Pacific, but while there are said to be many quality power and gas assets seeking buyers in the region, worries about the underlying market and macro-economic fundamentals are acting as a deterrent.

Many respondents are still interested in the Russian market although few say they have yet decided what form investment in the country would take. Some opportunities are expected as Russian gas companies look for funds for upstream activity.

Overall, the survey finds there is a greater degree of caution among respondents this year than last. Players on both sides of the Atlantic are suffering from uncertain market conditions and, in many cases, volatile prices. In the US, liquidity and credit pressures are expected to keep players in the country cautious for many years to come.

*Movers and Shapers 2003: Utilities Europe. By PriceWaterhouseCoopers

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