Utilities: big Euro-deals dominate
Europe's big utilities are restructuring under European Commission guidance in the face of possible Gazprom domination
WHILE oil and gas firms have been dealing with a restructuring of the balance of power in their sector, utilities companies in Europe and Asia-Pacific have been going for scale. But even here, the influence of the state is evident.
Surprisingly, despite a sharp downturn in M&A activity among US utilities – triggered by uncertainty as regulators increased their scrutiny of the utilities – the value of global transactions in the sector in 2006 reached $298bn, according to PricewaterhouseCoopers (PwC), a consultancy, breaking the record set in 2005.
The two biggest deals, E.On's failed bid for Endesa and Suez's planned merger with Gaz de France (GdF) both ranked high in Petroleum Economist's polls. At $66bn and $43bn, respectively, both were mega deals. And both were derailed – one fatally, one potentially fatally – by the interference of the state.
E.On, nothing if not ambitious, wished to add Spain to its growing portfolio of downstream markets. And its on-again-off-again take over of Endesa exposed many of the fault lines in the European Commission's attempts to create a genuine common market for EU energy consumers. Its offer for Endesa was supported by the Commission even though Brussels has also been clamouring for greater unbundling by various European utilities, including E.On, in its drive to promote competition.
The Commission's president, Jose Manuel Barroso, claims the EU needs a handful of large utilities capable of running the continent's gas and power markets and standing up to companies such as Gazprom, which sees Europe's downstream as ripe for conquest. (Ironically, E.On is one of Gazprom's closest allies among European companies.) In practice, that means the Commission wants to see E.On, Italy's Enel, GdF and Electricité de France, and at most another couple of firms, emerge as transnational European champions – or an oligopoly, according to critics.
The companies share that ambition. Pursuit of scale, says PWC, has been the hallmark of the M&A activity in the utilities sector over the last year. Iberdrola's $22bn purchase of Scottish Power, for example, makes the Spanish firm one of the world's largest wind-power players.
Iberdrola might also have been motivated by insecurity – scale will give it greater protection against a take over. But the drive for scale of the other companies is more about shoring up their positions at the head of the pack of European utilities before full liberalisation of the continent's energy markets takes place next month.
Spain did not want Endesa to be sacrificed for that ambition. It first promoted a rival bid from local Gas Natural. When E.On was still not put off, it used a number of political manoeuvres to kill E.On's bid, prompting accusations of energy nationalism even at the heart of Europe's own market.
The outcome of the mess was a score draw for E.On and Enel. The latter entered the bidding for Endesa, alongside Acciona, a Spanish partner, with which it had bought almost half of Endesa – making E.On's bid highly unlikely to secure shareholder approval. A deal between the German firm, Enel and Acciona, will see assets divided among the three. E.On will pay €10bn ($13.5bn) to Enel and Acciona if their take-over of Endesa succeeds. In exchange, it will receive Endesa's assets outside Spain and some of Enel's within Spain.
That leaves E.On as the third-biggest electricity company in France and the fifth in Spain and Italy: a good result for the German company, at a far cheaper price that it was willing to pay for Endesa. The Commission may score a couple points of its own if it carries out its threat to take Madrid to the courts.
Politics has threatened another large proposed merger, between Belgium's Suez and GdF. That deal could have been completed months ago, creating Europe's largest liquefied natural gas importer. But truculent shareholders and unions stopped it from happening. And by the time the French election was under way, confusing messages from the two main candidates threatened to undermine the deal.
Nicolas Sarkozy, elected president last month, was said to be against it: when GdF was partially privatised, he promised that the government would retain 70% of the company (it still owns 80%) – a pledge he will have to give up on if the merger takes place. And now that the threat of Enel attempting to buy Electrabel, a division of Suez, has receded, says Jerome Guillet, director of energy structured finance at Dexia, a bank, there is less enthusiasm for the deal in both companies.
Lost in much of the wrangling over the Suez and Endesa mergers was the EU's wider agenda – energy market liberalisation. Whether further growth for GdF and E.On, two of the firms it says are the worst offenders against the drive for open markets, will advance that cause is anyone's guess.
But if the Commission can sink its teeth into any of these players and force genuine unbundling of distribution and generation assets, then the increased M&A activity in Europe's utilities sector last year could be a sign of things to come. Banks, lawyers, accountants and other hangers-on could have much to thank the Commission for over the next five years. With any luck, consumers will, too. n