July 17, 2008

SSE: Looking to Grow Presence in Ireland

Scottish & Southern Energy is reported to be in the process of lining up a bid for Energia. The UK energy supplier already has a small presence in Ireland, and an acquisition would be a much easier way of gaining market share than organic growth. However, rumors are also circulating that Vattenfall could be interested in acquiring Scottish & Southern Energy.

UK energy supplier Scottish & Southern Energy (SSE) is reported to be included in a list of potential suppliers looking to purchase Irish energy supplier Energia, a branch of Viridian Energy, from private equity firm Arcapita. Arcapita is inviting bids for the Energia business, and it is likely that many European utilities will be interested in acquiring the emerging supplier.

Although Energia has a very small generation and customer base by European standards, and while this may put-off very large European utilities, a supplier such as SSE would be able to add Energia's assets to its current Irish brand, Airtricity. Airtricity has a wind generation portfolio and around 30,000 customers, making it a similar size to Energia.

SSE will have an advantage over other potential suitors due to the Scotland-Northern Ireland inter-connector. This link provides an easy transportation route from SSE's main generation sources in the Scottish highlands to customers in Ireland, and will also facilitate the export of generation from Ireland into the UK market. SSE may also have operational advantages, with call center and back office functions possibly being merged into Airtricity or even into the UK SSE infrastructure.

However, it remains unclear how SSE will secure funding for the acquisition. In the current climate of limited credit availability, a relatively small European company such as SSE may struggle to find the necessary capital to finance the acquisition. In addition, SSE also needs to keep an eye on its own future. Speculation has emerged regarding a possible move for SSE by Swedish utility Vattenfall. Vattenfall may be looking to expand its European base to keep up with its big German counterparts, RWE and E.ON, and SSE is likely to appeal to Vattenfall due to its relatively small size and spectacular customer growth in the UK over recent years.

Although SSE is ideally placed to obtain synergies from the acquisition of Energia, the deal may not be easily achieved. Indeed, SSE's size may make raising capital problematic, and it also faces the threat of being taken over itself by one of the large European companies.