March 30, 2001Acquisitions of U.S. energy companies and assets by foreign investors totaled $15 billion in 1999, their second highest level in the 1990’s, the Energy Information Agency said.
The largest foreign acquisition in energy was ScottishPower’s purchase of PacifiCorp, valued at $11 billion. This merger was more than enough to allow the electric power industry to dominate foreign acquisitions of U.S. energy assets for the first time. In 1998 foreign acquisitions of energy assets totaled $57 billion, largely as the result of British Petroleum’s $53 billion merger with Amoco.
Beyond energy, the worldwide value of all international mergers and acquisitions in all industries initiated (but not necessarily concluded) in 1999 was at an all-time high, up 47 percent from 1998. The United States experienced the largest total value of proposals for inward international investments (i.e., acquisitions of domestic assets by foreign investors), while the United Kingdom registered the largest value for outward investments (i.e., acquisitions of foreign assets by domestic investors). On an industry basis, the minerals extraction industry (including oil and gas) and utilities (including electric and gas) had the third and fifth largest values, respectively, of worldwide international deals proposed.
Mergers and acquisitions of companies or assets in the United States by foreign investors are often transactions that involve foreign direct investment (FDI transactions); that is, they are acquisitions or divestitures of a U.S. business or asset made directly or indirectly by a single non-U.S. investor who has or gains ownership of at least 10 percent of the U.S. business or asset. FDI transactions in the energy industry are the focus of the discussion here.
Electricity Dominates FDI Energy Acquisitions
Acquisition of PacifiCorp sets a precedent. The largest FDI acquisition in U.S. energy in 1999 was ScottishPower’s $10.9 billion ($6.5 billion in stock and $4.4 billion in assumed debt) takeover of PacifiCorp, the first purchase of a major U.S. electric utility by a foreign company. ScottishPower, with operations in integrated electricity and gas, water, and, telecommunications services, is the second-largest utility in the United Kingdom. It was privatized in 1991 and has been expanding rapidly since then. PacifiCorp is an integrated electric utility with 1.5 million retail customers in six Western states, $3.3 billion of electric utility revenues, and 8.5 gigawatts of electricity generation. At the time of its acquisition, it owned the largest electricity distribution company in Australia, which has since been divested. PacifiCorp is also attempting to sell its electricity service area in northern California and its coal mines.
In order to get approval for the acquisition, ScottishPower was required to obtain the authorization of six State and two Federal regulatory agencies. One of the major conditions imposed by the regulatory authorities was that PacifiCorp’s U.S. operations be kept independent of ScottishPower’s British operations. Another condition was that PacifiCorp meet eight service guarantees to its customers or pay them a penalty. The company also pledged to lower its operating costs.
The second-largest FDI energy acquisition in 1999 was Sithe Energies’ purchase of the bulk of the fossil fuel and hydroelectric generating facilities previously owned by GPU, Inc., for $1.7 billion. The assets totaled 4.1 gigawatts of generating capacity in Pennsylvania, New Jersey, and Maryland. Vivendi (France, now Vivendi Universal) owned 60 percent of Sithe at the time, while Marubeni (Japan) owned 30 percent. After the acquisition, Sithe operated 49 power plants in North America with a generating capacity of 8.1 gigawatts. In 1998, Sithe had purchased six plants in New England with a capacity of 2.0 gigawatts from Boston Edison for $536 million.
Coal Continues to Attract Foreign Investors
Coal also major attraction. As part of its effort to expand internationally, RAG International Mining (Germany) purchased Cyprus Amax Coal, which owned 9 coal mines in the United States, for $1.1 billion in 1999. After the purchase, RAG controlled a total of 17 coal mines in the United States. RAG, which was first established in 1969 solely as a mining company, has grown into an international energy and technology conglomerate. RAG also has mining activities in Germany, Venezuela, and Australia, and became the second largest coal producer in the world in 1999. Including RAG, three of the top five coal producers in the United States in 1999 were foreign-affiliated
Five other notable FDI transactions occurred in 1999. Royal Dutch/Shell (United Kingdom and Netherlands) completed two large divestitures. It sold its shallow-water properties in the Gulf of Mexico (about half of Shell’s holdings there) to Apache, an independent oil and gas producer, for $744 million, and it sold its subsidiary Transok, a gatherer, processor, and transporter of natural gas, to OGE Energy, an electric utility holding company, for $701 million. In a non-FDI transaction between two foreign investors, BP Amoco and Respol-YPF dissolved their U.S. partnership, Crescendo Resources, with BP Amoco purchasing a significant share of Crescendo’s assets for approximately $400 million. In FDI acquisitions, AmerGen Energy purchased two nuclear power plants from two different U.S. utilities for a total of $120 million. AmerGen is a joint venture between British Energy and PECO Energy that was formed to acquire and operate nuclear power stations.
Foreign Investment Not Captured
No transaction reported for Transocean Offshore. Transocean Offshore was a U.S. drilling services contractor but was reorganized in 1999 as a Cayman Island corporation. In retaining its U.S. assets, Transocean formed a wholly owned U.S. subsidiary to which it transferred more than half of its assets. The amount of the transfer was not reported publicly. These assets would most likely qualify as FDI assets, but no amount for them can be included here. A subsequent merger valued Transocean at $3.0 billion.