August 11, 2008

Rejected EDF Has More Irons in Fire


ANALYSIS BRITISH Energy still hopes to strike a takeover deal with EDF, but the cash-rich French utility has a number of other options it could pursue if negotiations with the East-Kilbride- based nuclear power generator collapse.

Top executives at Paris-based Electricite de France, which is controlled by the French state, are looking at other ways to build on the company's global nuclear leadership and develop lucrative new businesses such as gas.

EDF was expected to announce a full cash GBP12bn offer for British Energy on August 1, after a marathon round of talks and winning the approval from the UK Government, which owns 35per cent of the Scottish-based nuclear power plant group.

But two key institutional investors in British Energy - Invesco and M&G - unexpectedly rejected a bid valued at around 770p to 775p a share for being too low, sending EDF back to the negotiating table and threatening to derail a deal that may be crucial for the development of new British nuclear power stations and EDF's expansion plans.

Both companies are still talking, but City power industry analysts and market players believe EDF is unlikely to increase its offer and risk overpaying for British Energy, the owner of most of Britain's existing nuclear power plants and whose land around existing sites is viewed as the location for new developments. Many of British Energy's plants are old and have been plagued by breakdowns. The company has proved hard to value because of the volatile price of electricity, which has both soared and eased off during the months of negotiations.

"EDF doesn't seem ready to make an acquisition at any cost and this is rather good news for investors, " said Jacques-Antoine Bretteil, a Paris-based fund manager at International Capital Gestion.

However, failing to close a deal with British Energy would not mark the end of EDF's ambitious plans to expand in Britain. The company already owns London Electricity and other power companies in southern England, and claims to be luring customers in Scotland away from Scottish & Southern Energy and Iberdrolaowned ScottishPower.

"British Energy would have been an ideal entry point for EDF, and EDF may have regrets about the deal not happening, but this doesn't at all slam the British nuclear door in their face, " said Colette Lewiner, an energy sector expert at French management consultancy Capgemini.

"If a deal does not materialise, British Energy will be encouraged to strike partnerships on (new nuclear) sites, so it will just involve a different scenario for EDF, " she added.

EDF is the world's biggest single producer of nuclear energy, and is France's biggest power provider with 25 million household customers.

French power tariffs, which are set by the state, are among the lowest in Europe because EDF produces relatively cheap electricity from its 58 nuclear reactors.

It could still be at the forefront of Britain's nuclear power renaissance, but this time by agreeing joint ventures or building newgeneration reactors on its own land.

In May, the French group bought land next to two nuclear power plants in Britain. One is located at Hinkley Point in south-west England, and the other is at Wylfa in north Wales. EDF acquired the land in the hope that it can build new reactors on the sites and use the grid connections and infrastructure around existing reactors in adjacent areas.

But the UK is only one of four countries that EDF targets for its international development. It has ambitious nuclear plans in the United States, South Africa and China, where it will run two new- generation reactors with China Guangdong Nuclear Power Corporation.

EDF has set aside ?35bn for investments between 2008 and 2010, and if the cash is not used for acquisitions, it will be spent on industrial projects to spur organic growth.

In its core nuclear power business, Lewiner said EDF has "many irons in the fire" with its international development, and plans to flesh out its French fleet of 58 reactors with one, or maybe two, new-generation European pressurised reactors.

"They will need money for these projects. Just in Britain, they must buy land and build reactors. We're talking about a few billion euros for each one, which is not trifling, " she said.

EDF has projects to build a gas business at a time when the newly merged GDF Suez group can offer a one-stop shop for electricity and gas, threatening to poach EDF customers.

On Thursday, EDF received a boost from the French government when the finance ministry proposed allowing regulated power rates for households to rise by as much as 2per cent and natural-gas tariffs by an average of 5per cent.

The government also said electricity charges may climb by 2per cent for small companies, 6per cent for mid-sized businesses and 8per cent for large consumers. The increase in gas rates will be the same for all customers.

"The rise in electricity rates is closely correlated to current inflation and this is better than what the market had in mind, " said Peter Wirtz, a Dusseldorf-based analyst at WestLB Equity Markets. "The government is paying more attention to what EDF needs."

EDF, which produces continuous electricity from its reactors in France, also needs to invest in gas-fired plants, which can be switched on and off fast to meet peak electricity demand.

The utility, which in June got the green light to build one of Europe's biggest liquefied natural gas terminals in the port of Dunkirk in northern France, may seek to secure gas imports from producers such as Qatar, or invest in gas fields.

EDF has so much cash that it could afford to spend nearly ?5bn to finance a thrust in the gas sector, roughly the price of Belgian gas firm Distrigas, which the French group lost to Eni (Ente Nazionale Idrocarburi), Italy's national energy corporation, in a bidding process organised by Suez in June.

"Distrigas was definitely a very interesting asset that was on the market. Gas Natural is another one, but with Union Fenosa now they will probably become too big, " said analyst Koen Dierckx, a broker at KBC Securities in Brussels, referring to Spanish-based Gas Natural's recent deal to buy a 45per cent stake in Union Fenosa from debt-laden builder ACS (Actividades de Construccion y Servicios).

"They may just try to grow the gas business organically with not so much of a focus on acquisitions at this time, " Dierckx added.

Originally published by Newsquest Media Group.

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