E.ON AG, Germany’s second-largest electricity utility, made its first significant move in its strategy to become an international energy group when it announced in April its intention to purchase Powergen, a UK energy provider. The €15.3bn ($16.9bn) deal gives E.ON a strong basis for future growth with a foothold in both the US and the UK energy markets.
Powergen’s board has already recommended the deal to its shareholders. E.ON has offered £7.65 ($11.09) per share, valuing Powergen’s equity at £5.1bn, and will also take on Powergen’s debt, valued at £4.5bn. E.ON and Powergen will seek regulatory approval for the deal before a formal offer is made, and expect the transaction to close by early 2002.
If the acquisition is successful, E.ON will become the world’s second-largest energy service provider after Electricité de France (EDF), with electricity sales of 323bn kWh and 30 million electricity and gas customers. It will have positions in the UK, Germany, Scandinavia and Eastern Europe, and, crucially, the USA, that will enable it to pursue new growth opportunities.
“The acquisition of Powergen is one major step – but certainly not the last one – in the growth strategy that we are pursuing in the energy sector, our core business area,” said E.ON CEO Ulrich Hartmann. “Our successful strategy of ‘focus and growth’ is now entering a new phase in which we will fully concentrate on the energy service business, which we intend to steer to a new growth dimension.”
The acquisition is in line with E.ON’s stated ambition to become a leading international energy company, and will allow E.ON to expand beyond its home market, where competition has put downward pressure on prices and reduced E.ON’s prospects for growth.
The deal is the largest in the history of E.ON AG and is sizable even for a company the size of E.ON. E.ON says that it will finance the deal from liquid funds and credit lines, and – alluding to the size of its wallet – will continue to have the financial scope needed for further expansion.
E.ON’s offer represents a premium of 25.8 per cent over the closing price of Powergen shares on January 16, 2001, the day before the two companies confirmed that they were in merger talks, and a 35.2 per cent premium over the average Powergen share price over the six months to 16 January 2001.
E.ON countered a common criticism of recent European M&A deals that it was paying too high a premium: “This valuation is more or less in line with current trading multiples of British and European utilities, but below the multiples of recent utility transactions in the UK and Spain,” said Hartmann. The company noted in its statement that the deal would lead to a significant improvement of E.ON’s earnings.
The markets looked favourably on the deal. Shares in E.ON rose nearly five per cent and Powergen’s stock rose just over one per cent after the deal was announced. The reaction of ratings agencies was mixed – Standard & Poor’s expressed concern over the size of the acquisition while Moody’s looked positively on the deal as part of E.ON’s strategy to focus on core activities. Both agencies said the deal would benefit Powergen.
The deal is not expected to generate synergies or cost savings for E.ON. Under the agreement, Powergen will become a subsidiary of E.ON, responsible for running and developing the group’s UK and US activities. E.ON will also continue its strategy to focus on the energy sector, and will divest non-core business units such as VAW aluminium, Klöckner & Co., Stinnes and MEMC. Its Degussa chemicals division will also be sold off in the medium term.
Standing out from this deal is the fact that Powergen gives E.ON an immediate presence in the US. During an annual news conference in March, Hartmann stated that the company had a war chest of between €30bn and €45bn for acquisitions, and cited the US and Spain as areas of interest. With prospects in Spain looking over-priced, E.ON is keen to expand in the US.
Following in the footsteps of UK companies ScottishPower and National Grid Co., Powergen announced in early 2000 that it had reached a deal to buy Kentucky-based LG&E Energy Corp. for $3.2bn. The deal was a major part of Powergen’s international expansion plans, designed to counter its shrinking market share in the UK, but proved to be a financial burden that it could not service.
Powergen financed the acquisition of LG&E, a diversified energy services company, entirely through borrowings, and embarked on a programme of asset divestment to reduce debt by £1bn. The recent acquisition of Powergen’s German and Hungarian assets by NRG Energy brought this debt-reduction programme to a close. Since mid-2000, Powergen has sold the majority of its assets in Asia, Australia and Europe, as well as some UK holdings, and as a result has reduced debt by £1.37bn. This, it seems, was not enough to save it from cash-rich predators.
Nevertheless, Powergen chairman Ed Wallis was positive about the deal: “Our management teams share a common vision and strategy for the future growth of our company, which can become reality more quickly by our working as part of a group with E.ON’s strength. We will benefit from the scale we will gain from joining E.ON.”
Like other European companies looking to expand beyond their home markets, the US is an attractive prospect for E.ON. LG&E will serve as a strong base from which to expand in the USA, and Powergen’s experience in the market will give E.ON an edge over other European competitors looking to make their first move across the Atlantic. In 1999 LG&E had a turnover of $2.7 bn (£1.7 bn) and earnings from continuing operations of $236 m (£147.5 m).