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Gas Natural: Power Divestment Could Be Blessing in Disguise

Posted on: Monday, 13 February 2006, 09:01 CST

The Spanish government has approved Gas Natural's takeover of Endesa, with the proviso that Gas Natural sells off more power and gas assets. With growing gas and power demand in Spain, the attractiveness of these assets means they could be a lucrative source of income for the new entity, potentially catalyzing its Europe-wide ambitions.

Gas Natural, Spain's largest gas supplier, now has the Spanish government's approval to proceed with its hostile takeover of Endesa, though the latter is set to take an appeal to the Spanish Supreme Court and to the European Court of First Instance in Luxembourg.

If the takeover goes through, Gas Natural has still to comply with conditions set by the government. It would have to sell 2.8 billion cubic meters of gas per year from 2007 to 2009 from its contracted supply. It would have to divest Endesa's minority shares in two LNG terminals due to open later this year. Gas Natural would also have to cut its ownership in the national gas network Enagas to 1%. These particular divestments are unlikely to attract new entrants or add further liquidity to the gas market.

The proposed 3,100MW capacity divestment has been increased to 4,300MW by the government under its new conditions. This equates to Gas Natural having to sell about 20% of Endesa's power generation assets. As yet there are no indications on what type of power generation assets it would be willing to sell. Endesa's coal-fired plants, accounting for almost 50% of its power production are a possible choice, considering the emission costs.

The power assets could see potential bids from Hidrocantabrico or new entrants such as RWE, with a large coal based portfolio. Enel Viesgo, with 2,200MW of installed capacity, is long on power in Spain and would probably not be interested in coal-fired generation investments.

Belief is Iberdrola will still acquire assets, but depends how stringent the regulator will be. Power assets are still attractive with recent spot prices having recorded at double the forward price for Q1 2006. With a growth in gas and power demand in Spain, the attractiveness of these assets will find a number of interested bidders who may even overpay.

Even though the group would lose Spanish market share, it may find a higher return on its divested assets, which could in turn kickstart its European ambitions.

Source: Datamonitor

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