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Endesa Rejects Gas Natural Bid But Other Power Deals Are Likely Before Power Market is Freed

Posted on: Wednesday, 7 September 2005, 09:00 CDT

The board of the Spanish power producer Endesa on Tuesday rejected a hostile 22.6 billion bid from its compatriot company Gas Natural as too low, but analysts are predicting more such deals as utilities seek to combine electricity and natural gas assets before 2007, when the Continent's power market is to be fully opened. The bid, announced late Monday and worth the equivalent of $28.3 billion, came as the German utility E.ON said it was considering a cash offer for a leading British energy supplier, Scottish Power. The French utility Suez last month offered 11.2 billion in cash and shares to buy the largest Belgian power company, Electrabel, and speculation is growing that Union Fenosa, another Spanish utility, will be among the next European utilities to receive an offer. After a meeting Tuesday evening, Endesa's board rejected Gas Natural's bid as being against the interests of shareholders and consumers."The economic terms of the offer are manifestly insufficient and in no way reflect the real value of the company," the board said in what it called a preliminary evaluation. It added that the deal was "hardly compatible with the regulatory environment or laws on competition," and that it carried risks that could be detrimental for shareholders.

Rafael Villaseca, chief executive of Gas Natural, said earlier that his company would not bid more than the 22.6 billion already offered. "This is our only offer," he said. "This is it."

The size of the proposed deal had already generated some controversy. It would create the largest electricity and natural gas company in Spain and Latin America, and one of the largest in Europe. The new entity would have more than 70 percent of the natural gas market in Spain, and about 45 percent of the electricity market. Officials of the main opposition group in the Spanish Parliament, the conservative Popular Party, charged that the takeover would give the combined company too much power and would lead to higher prices. "This is an attack against competition, against the interest of consumers," said Mariano Rajoy, president of the party. But Villaseca earlier defended the deal from criticism that it would create a near-monopoly in Spain. The merger, he said, would combine two companies from separate markets, so neither would achieve any significant increases in market share. "There is a lack of competition, not of competitors," Villaseca said. Gas Natural also said it had agreed to sell some assets from the new combination to a third Spanish utility, Iberdrola. The assets would have included electricity generation units in Spain and facilities in France and Italy. Iberdrola rejected a similar bid by Gas Natural in 2003. An aide to the Spanish prime minister, Jose Luis Rodriguez Zapatero, said before the board meeting that the government had no plans to oppose the deal. "The government will study it to make sure the interest of the consumer is protected, but as long as consumers are not hurt by this, the government will not favor the deal or put up obstacles to it," said the aide, who followed Spanish protocol in requesting anonymity to avoid upstaging his superiors. Regardless of the final outcome of this particular bid, analysts said more consolidation was likely. "These gas and electricity deals make sense," said Colette Lewiner, the Paris-based head of energy and utilities for Cap Gemini Ernst & Young, a consultancy. "Gas is more and more used to produce electricity, and electricity companies have a large customer base, so these synergies are important."

Lewiner, who is advising some of the companies involved, said a number of European energy companies had plenty of cash and were ready to buy after focusing on core operations in recent years. Fabrizio de Candia, a Paris-based director of Cambridge Energy Research Associates who closely monitors European power markets, said that "most gas companies don't have a power production business and most power production businesses don't have flexible supplies of gas, so these deals really do represent a step change in the industry." Gas Natural told Endesa shareholders that combining call centers and billing, marketing and administrative units could yield savings worth 350 million a year from 2008 onward. Gas Natural said it planned to invest 17 billion to increase generation and distribution, with 60 percent of that in Spain. It also said that its joint venture with Repsol for liquid natural gas would help ensure steady supplies. Endesa shares rose 1.46 to close at 20.55, and Gas Natural shares fell 55 cents to 24.24. ***

James Kanter reported from Paris.

Source: International Herald Tribune

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