Merger mania rages among electric utilities worldwide

By Simon Allen

Price Waterhouse World Energy Group

1995 saw an unprecedented number of mergers and acquisitions that started to reshape the worldwide electricity sector. One year later, and maybe one year wiser, we see that what started as a rush has now turned into a steady flow.

The main drivers behind the high level of activity are:

– increasing competition in home markets,

– the desire to gain experience of competitive markets,

– global expansion to access new markets and

– enhancing long-term shareholder value.

Most utility executives continue to view competition as the most significant issue facing their company and see a close link between ensuring a smooth transition to a competitive marketplace and enhancing shareholder value, according to Price Waterhouse`s “1996 Survey of Developments and Financial Reporting.”

Liberalization of the electricity markets in the UK and Scandinavia has been one of the factors behind the level of takeover and merger activity in these territories. This was evident in 1996 with US companies taking over Midland Electricity Board (MEB), East Midlands Electricity and Northern Electric, with London Electricity likely to follow soon. There could have been more as only intervention from the regulatory authorities prevented National Power from being acquired by Southern Co.

Scandinavia

In Scandinavia, the combined electricity market of Sweden and Norway may be suffering from a number of teething problems, but this has not prevented the major players from seeking to increase their share of the market through acquisition. Finland`s IVO now has control of Gullspang Kraft, Sweden`s fourth-largest generator, and the number of distributors in Sweden continues to decline, with deals such as Sydkraft`s acquisition of Orebro Energi.

Elsewhere in Europe the passing of the EU Directive on the liberalization of electricity markets is having an impact on industry consolidation. In Spain, the Spanish government has approved Endesa`s acquisition of controlling stakes in Sevilliana de Electricidad and Fecsa. In the Netherlands, the four largest generators (EPON, PEZ, EZH and UNA) are continuing to hold merger talks. In Germany, EVS and Bedenwerk are pursuing a merger and Bayernwerk is seeking to acquire the majority of Isar-Amperewerke. In Denmark, Vattenfall`s acquisition of a 10 percent stake in NESA sparked concerns amongst the Danish government when it was reported that Vattenfall was also interested in acquiring the 80 percent stake in the company held by the local municipality of Gentolfte.

Switzerland and some of the other countries on the fringes of the EU have also seen merger activity in 1996. Electricite de France and RWE jointly acquired a 40 percent stake in Motor Colombus, which controls Aare-Tessin, the country`s largest electricity company. Although privatization of the Hungarian electricity industry slowed, due principally to governmental delays in approving price increases, both AES and IVO acquired state-owned power plants. In the Czech Republic, the sale of strategic stakes in the eight regional distribution companies has been deferred once again. However, Eastern Group acquired a small stake in one of the distributors and took a controlling interest in a cogeneration company. In Croatia, HEP signed an agreement with RWE to complete a power plant and agreed to a memorandum of understanding with Enron and Enserch covering two greenfield power stations.

Outside Europe, cross-border activity continued in Australia and South America. Following the successful sale of five distributors in 1995 to US utilities, the State of Victoria sold two of its generators to the UK`s National Power and PowerGen. Sell-offs in Brazil commenced with the sale of LIGHT to a consortia of Electricite de France, AES and Houston Industries, followed by the sale of Cerj to a consortia of Chilectra of Chile, Endesa and Electricidade de Portugal.

One feature of the acquisition activity in 1996 has been the number of potential buyers. The sale of Cerj attracted 29 bids and a similar number are reported to be interested in acquiring a stake in Bewag, the Berlin-based utility, and in HEW, the Hamburg-based utility. In Turkey, more than 50 bids for 19,000 MW of greenfield and existing plants have been made, with particular interest in the gas-fired stations.

Globalization of the utility industry is moving rapidly ahead, despite the concern expressed by some commentators who have encouraged shareholders in utilities to dismiss talk of globalization in an industry whose product is consumed locally. Southern`s acquisition of Consolidated Electric Power Asia (CEPA) was perhaps one of the most notable deals of the year, not only because of the transaction value, but also the market penetration it gives Southern in Asia. There were many others in the UK and Australia and also in China, where Electricit? de France won the contest to develop China`s first wholly foreign-owned, build-own-transfer plant at Laibin.

Big deals of 1996

The biggest deals of 1996, listed by acquirer, target and purchase price in US dollars, were:

– Duke Power (US), Pan Energy (US), $7.7 billion;

– Avon-GPU/Cinergy (US), MEB (UK), $2.8 billion;

– Enova (US), Pacific Enterprises (US), $2.8 billion;

– Southern Co. (US), CEPA (Asia), $2.7 billion;

– Scottish Power (US), Southern Water (UK), $2.7 billion;

– Houston Industries (US), NorAm En-ergy (US), $2.4 billion;

– Electricit? de France (France), AES and Houston Industries (US), Light (Brazil), $2.3 billion;

– Enron (US), Portland General (US), $2.1 billion;

– Dominion Resources (US), East Midlands Electricity (UK), $2.1 billion;

– PowerGen (UK), Yallourn (Australia), $1.9 billion; and

– National Power (UK), Hazelwood (Australia), $1.9 billion.

Petroleum interests

There has also been much talk of the multinational oil companies increasing their involvement in the power sector. Price Waterhouse`s “1996 Petroleum Industry Review” showed that five of the top 30 companies reported initiative in electricity generation projects in letters to shareholders, but there are clear signs that their participation in the power sector is going to increase. As an example, the list of bidders for the Turkish gas-fired plant includes Arco, Conoco, Mobil and Total.

In addition, Exxon Energy recently agreed to participate in a consortium seeking to build a 1,000 MW plant in China.

Although the larger European electricity companies all increased their overseas activities in 1996, the large US companies also continued to look for ways to invest their huge cash balances. More than 60 percent of the leading US electricity companies now have investments overseas. Many of the leading companies also increased their operations in the US through acquisition. In 1995, most of the domestic US mergers were between electricity companies with similar cost structures serving contiguous territories.