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Spain: E.On throws in the towel

DESPITE admitting defeat in its 17-month battle to buy Endesa, E.On has come out of the merger saga smelling of roses – unlike the recalcitrant Spanish government. Wulf Bernotat, the head of E.On, admitted last month that government efforts to thwart his firm's plan to buy Endesa had doomed it to failure; instead, it agreed with the other contenders for the Spanish utility's hand – Italian utility Enel and local construction firm Acciona – to withdraw its bid in return for some of Endesa's assets.

"Acciona and Enel's involvement in Endesa has made our original goal of acquiring a majority stake impossible," Bernotat said in a statement, referring to the almost 50% stake in Endesa which those two companies and the state-owned holding company Sepi hold together.

Assuming that the €41-a-share ($55) bid from Enel and Acciona succeeds where E.On's failed, the German utility has agreed to buy €10bn-worth of Endesa's assets in Spain, France Italy, Poland and Turkey, as well as some of Enel's operations in Spain.

In Spain, E.On will acquire Enel's Viesgo, a utility whose installed capacity, 2.4 gigawatts (GW) at present, is expected to increase by around 50% by 2010. Together with the generating capacity from Endesa, E.On predicts that by 2010 its Spanish capacity will have a market share exceeding 10%, making it the fourth-largest player in the country. In France, E.On will acquire Endesa France/Snet, making it the third-biggest power provider.

These significant concessions drew praise from analysts. "We had estimated that an acquisition price of €40 per Endesa share would have destroyed value for E.On," says Grégory Deschamps, of Oddo Securities. "In contrast, the deal announced should create value ... E.On has achieved its strategic aim of securing strong positions in France, Spain and Italy – and at a reasonable cost."

And by avoiding paying a significant premium for Endesa and spending only €10bn, compared with the €41bn it was prepared to spend on the deal, E.On still has a significant amount of cash at hand to spend on other assets in Europe, including, reportedly, some in the UK.

For Enel, the outcome is more mixed. It is still involved in a take-over fight for Endesa, the success of which is far from guaranteed. However, it has local partners and this would keep Endesa, to some extent, in Spanish hands, so the government is more likely to look on the deal favourably.

For its part, Endesa's management was said to have reacted with astonishment at the agreement signed between E.On, Acciona and Enel. Having finally, publicly backed E.On's bid, the Endesa board now faces the withdrawal of the German group's offer and a joint Enel-Acciona take-over.

However, the price Enel is paying for its Spanish expansion is a steep one. Enel will pay a 35% premium over Endesa's net asset value, quite apart from the value destruction resulting from the disposal of some of Endesa's most promising assets. Analysts say Acciona came out better than Enel. For its help in defeating the German bid, the construction firm is likely to receive juicy state construction contracts. It also has the option to sell its Endesa stake to Enel between 2010 and 2017 at a minimum price of €41 a share and will receive Endesa's renewable-energy business, which will complement its own.

The biggest loser? The Spanish government. Prime minister Jose Luis Rodriguez Zapatero's ham-fisted efforts to limit foreign access to the country's energy market, which he has termed a "strategic sector" and so exempt from normal EU take-over regulations, has angered just about everyone, especially the European Commission.

The Competition Commission waved through the deal between E.On and Endesa in April 2006 on the grounds that the German company is not operating in the Spanish market and, therefore, no competition issues arise, only to have it blocked by Madrid. The EU is taking legal action against Spain for breaking European take-over rules. Furthermore, the government's efforts to preserve Endesa as a national champion looked to have failed if Enel and Acciona's bid succeeds.n


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