Endesa loses battle for Enersis

In recent developments in Chile, Enersis shareholders have rejected Endesa of Spain in its bid to gain control of the holding group, and Duke Energy of the USA has made a bid for control of Endesa Chile. The moves illustrate the enthusiasm that large energy companies still hold for Latin America, but also show that it is still a tough market to crack. Siân Green reports.

The long battle for control of Enersis by Spanish group Endesa came to a close last month after Enersis shareholders voted to reject the Spanish group`s $1.45bn offer to double its stake in the Chilean energy holding company. As PEI went to press, the Spanish company was calling for a recount of Enersis shareholders` votes after narrowly failing to win the 75 per cent majority needed to change the company`s statutes.

In a similar development last month, Duke Energy Corp. of the USA made a bid for a controlling stake in another Chilean energy company, Endesa Chile. The success of this offer depends on a meeting to be called in March.

Duke has offered $2.1bn for a 51 per cent stake in Endesa Chile, a move which if successful, will make the company a leading player in the Latin American energy markets. Spain`s Endesa is now reassessing its Latin American strategy, and is said to be keen on finding another partner to help it grow in the region. In spite of the economic downturn, Latin America seems to remain a hot spot for the large international energy groups.

The privatized Latin American utilities are highly strategic pickings for those willing to risk investment in what is an economically unstable region; Duke Energy`s move has certainly been described as aggressive by analysts. Other international giants including Electricité de France, AES, Tractebel and Endesa have also taken this risk, building up a significant presence in Chile, Brazil, Argentina and Peru, and are waiting to reap the rewards.

In spite of the current economic downturn in the region, Latin America is still expecting significant growth in energy demand over the next few years. An early foothold in the region is therefore strategically sound for these large investors, creating a base for future growth.

If Duke Energy`s bid for Endesa Chile is successful, it will add more than 10 GW of power generating capacity to the 2300 MW which Duke already has in South America. It will also give Duke a 55 per cent share of the Chilean electricity market, and large stakes in Brazil, Peru and Argentina.

Endesa`s bid for Enersis was part of a similar strategy to build on its presence in the region in both the generation and distribution markets. The company currently holds a 31.6 per cent stake in Enersis and wanted to double this holding. Enersis is one of Latin America`s biggest energy multinationals and controls $14bn in distribution assets in Chile, Brazil, Argentina, Colombia and Peru. It also holds a stake in Endesa Chile which accounts for its generation assets. Its estimated total revenue for 1998 is $3.2bn.

Spain`s Endesa was attracted by Enersis` diversity and vertical structure. Its current holding in the company gives it three of the seven board seats; doubling its holding would have given it control of the company and a major presence in Latin America`s power markets.

Endesa made a $1.45bn offer to increase its stake in Enersis to 64 per cent. This offer worked out to be $32.78 for each American Depository Receipt (ADR), a 22 per cent premium on ADR prices in early February. But in spite of this, Enersis shareholders were never keen to see Endesa`s holding increase, and a conflict between the two sides gradually emerged.

The conflict was based on Endesa`s strategy for Enersis as an integrated electricity utility. The Enersis management team favours a streamlining of the company`s operations in the power market, and diversification into water and waste. The Enersis board therefore wants to sell the company`s generating assets and concentrate on power distribution. Spain`s Endesa was against this measure, arguing that an integrated company would provide a better platform from which to take advantage of electricity privatizations in Brazil and elsewhere in the region.

In early February, Enersis` shareholders approved a proposal allowing Enersis to seek a buyer for its 25.3 per cent stake in Endesa Chile. Endesa knew that if it could take control of Enersis, it would be able to block the sale of these generation assets.

Endesa Chile is Latin America`s largest private electricity generator, with more than 10 000 MW of generating capacity in Chile, Argentina and Peru. Spain`s Endesa was therefore keen for Enersis to keep its stake in this generator, the sale of which could raise more than $1bn for Enersis.

On 24 February 1999, Enersis shareholders voted on whether the Spanish group should be allowed to increase its holding to 64 per cent. In spite of their differences, Endesa`s bid was beginning to look as though it might succeed, and ironically, this was largely down to Duke`s bid for Endesa Chile.

In its bid for an increased stake in Enersis, Endesa had also run into opposition from Chile`s powerful pension funds, known as AFPs, which hold a significant stake in Enersis. However, Duke`s bid for Endesa Chile had softened their stance.

The AFPs control around 28 per cent of Endesa Chile, and were expected to block the vote on Duke`s offer. They had originally been concerned over the offer price made by Duke. However, AFP officials have now indicated that the Duke offer would allow them to realise a premium on their Endesa Chile holding, and still maintain a strategic interest in the company through its shares in Enersis. This made it more likely that the AFPs would approve Endesa`s bid for an increased stake in Enersis, and Duke`s bid for Endesa Chile.

Although Endesa`s future with Enersis may now be over, the company is unlikely to give up on the region. Whatever its next move, all eyes will now be on Duke and its bid for Endesa Chile.

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