Wave of consolidation as M&A frenzy hits European Utilities
Germany 's largest gas and power provider, Eon, has launched a 29.1bn Euro take-over bid for Spanish power provider Endesa, in the utility sector's largest every bid. Endesa is fighting the merger, and Spanish politicians hostile towards a bid from Eon, have approved a 21bn Euro merger between Endesa and Gas Natural, also of Spain, in an attempt to fend off Eon's approach.
Eon's bid would create a superutility worth 123bn euros - rivalling oil super majors such as Shell and France's Total. The precedent for such large deals was set in the merger frenzy that hit the oil industry in the 1990s. The utilities have managed to pass on rising energy prices to consumers and maintained their operating margins to accumulate massive amounts of cash; JP Morgan estimating that the top five European utilities could have 156bn euro to invest over the next three years.
Over the last decade the European energy markets have been deregulation and privatisation, to break-up monopolies and vertically integrated companies which in many cases controlled the entire supply chain, such as gas production to consumer electricity bills. The aim was to introduce more competition in the sector by enabling companies to operate in specific parts of the supply chain, such as pipelines for example. The fragmented and staggered process of deregulation however, has enable some utilities to have a head start on those from other countries.
Spain's Gas Natural is trying to match Eon's bid for Endesa, but said that before launching a higher bid than Eon's, it would wait to see how the country's regulators treat Eon's offer. Eon currently has no interests in Spain, so it is unlikely that Spanish regulators could prevent the deal on competition grounds without contravening EU rules. Enel has expressed interest in buying Endesa assets - a move that would appease Spanish regulators, and lower the cost for Gas Natural.
In a separate battle, French Energy giants Suez and Gaz de France (GdF) have unveiled a government-backed merger to create a new company worth over 72bn Euro (£49.7). The deal has been criticised by the Italian government who claim that the French government has given go-ahead for a Suez-GdF deal in order to protect Suez from a possible forthcoming bid from Italian utility Enel. Dominique de Villepin said "taking in account the strategic importance of energy, the merger of Suez and GdF seems the most appropriate track". De Villepin has reportedly telephoned the Italian prime minister Silvio Berlusconi, to express opposition to Enel bid. If Italy's Enel were to enter the French market by acquiring Suez, it would be the first time that Electricity de France (EdF), also owner of London Energy, would face serious competitor in its domestic market.
Suez is the world's largest water company, with foreign interests including Belgium's Electrabel, and has recently expanded into gas and power to take advantage of Europe's record energy prices. In the UK, Centrica, owner of British Gas, attacked the Suez-GdF deal as "a merger of former monopolies in one of the most closed markets" and called regulators to demand significant asset sales if the deal is permitted. It is expensive to attract new customers away from their existing suppliers, so utility companies hope to use the cost synergies created by merging two businesses to add value to their shares. The Suez-GdF deal is expected to provide cost-synergies of 500m euro p.a.
Protectionist national governments makes deals very difficult, claims one banker, and there will be many more deals talked about then there are deals done. However, with Europe's major utility companies accumulating so much cash, there are sure to be more deals to follow.
