Endesa and Iberdrola, respectively the largest and second largest electricity companies in Spain, agreed in October to merge to create one of the world’s largest electric utilities. The Spanish government has already indicated that it is strongly opposed to the deal, and the two companies are likely to have a tough time gaining approval.
Iberdrola agreed to the friendly takeover by Endesa, fending off an unwelcome bid by Gas Natural, the Spanish gas monopoly owned by Repsol-YPF. Repsol, keen to gain a foothold in Spain’s growing power generation market, is thought likely to mount a counter bid for Iberdrola.
Endesa’s bid values Iberdrola at a15.2bn ($13bn). The combined group to be called Endesa Iberdrola will result in a company with a market capitalization of a36.5bn and an 80 per cent share of the Spanish electricity market. It will be one of the world’s five largest electricity utilities in terms of company value and cash flow, the largest in terms of client numbers and the fourth largest in terms of installed generating capacity.
Endesa Iberdrola will have assets of a66.3bn and a turnover of around a19.7bn. Its power generating assets in Spain will amount to 38 617 MW based on a mix of nuclear, hydropower and thermal generating facilities, plus 13 000 MW of capacity in Latin America. Its customer base will be 18.4m, and it will also have 700 000 telephony customers in Latin America.
The merger will bring synergies of a500m per year from 2003. However, this is not the driving force behind the merger the strategic perspective seems more important to the two companies. In a joint statement, Endesa and Iberdrola said they believe that the merger will enable them to consolidate their assets in Latin America, develop a profitable presence in Europe, and build a business base in North America. In the medium term, they are aiming to have an installed generating base of 75 000 MW and 40m customers.
The existing chairmen of the companies Rodolfo Martin Villa of Endesa and Inigo de Oriol e Ybarra of Iberdrola will be co-chairman of the combined group, while Rafael Miranda, Endesa’s CEO, will be CEO.
“With this decision, which responds to a deep industrial logic, we start the process for the creation of a Spanish-based company that aspires to become one of the global operators of electricity and related services,” said Villa. “We believe that this process, which will permit to increase the competition in the Spanish market, will be positive for all the interests in presence.”
But convincing the Spanish government and the European Commission of these apparent benefits will not be easy. Only in May 2000 did the government block a proposed takeover of Hidroelectrica del Cantabrico, Spain’s fourth largest electric utility, by Union Fenosa, the third largest, on the grounds of reduced competition.
The government does not want to see less than four major players in its electricity market, nor does it want any one group to have a market share of more than 50 per cent. But Endesa and Iberdrola have pre-empted the government by clearly stating that “one of the essential features of the merger is the disposal of electricity assets in Spain”, and that this would bring new foreign players into the market, enhancing competition.
The companies will therefore look to sell around 15 000 MW of their combined generating capacity in Spain, as well as distribution franchises amounting to 25 000 GWh per year, or 4m customers. These disposals, say the two companies, will contribute to a wider opening of the Spanish generation market by introducing new players.
The disposals will be made through sales or asset swaps, and Endesa Iberdrola will be able to cherry-pick its own profitable, low-cost, optimized portfolio. Endesa is thought to have already entered talks with EDF of France and Italy’s Enel over the possibility of asset swaps. Opportunity for Endesa Iberdrola certainly lies in Italy, where Enel is looking to dispose of 15 000 MW through a competitive bidding process. France is likely to be a tougher nut to crack; the French government is unlikely to back the idea of foreign operators in its market, but Endesa has already made a move to test the water by bidding for SNET.
There is therefore the possibility of new opportunities for foreign players to enter the Spanish electricity market, where electricity demand is rising by seven per cent per year.
The proceeds from the group’s planned disposals will be used to invest in the core businesses of the new company, in particular in the electricity markets of Europe, North America and Latin America. The group will also target the telecommunications market and, with the help of its customer base, will look for growth through B2B and B2C e-business.
With considerable assets in Latin America, the proceeds from these sales could be spent reducing the new group’s debt of a27.8bn. Further expansion in Latin America and in the telecomms sector is a risky strategy, according to Standard & Poor’s. Nevertheless, the companies have stated that any investments would have to comply with profitability requirements of 15 per cent.
The two companies’ Latin American assets are highly complementary. The combined group will become the largest Latin American utility with a market share in the region of 12 per cent. Endesa owns 64 per cent of Enersis, the largest Chilean electricity group with operations across Latin America. Iberdrola has invested mainly in Brazil. The combined company will therefore have power assets in Chile, Argentina, Colombia, Peru and Brazil.
The deal is evidently good for both companies and possibly for competition in Spain and Europe as a whole, but the regulatory hurdles will be tough. One small fact in Endesa and Iberdrola’s favour is, ironically, the threat of a counter-bid from Gas Natural, which could spark a bidding war, something that the government does not want to see.