E.ON’s bid for Endesa looks good on paper but increased scrutiny of market consolidation in Europe means that the company may yet be thwarted by the muscles of Brussels

Siân Green.

Germany utility E.ON has announced an all-cash offer to buy Endesa, Spain’s largest electricity company, in a move that would create the world’s largest power and gas company and that signals a new wave of consolidation in the European utility sector.

E.ON has offered to acquire 100 per cent of the share capital of Endesa at €27.50 per share, or a total of €29.1bn. The enterprise value of the deal is €55.2bn including net debt, provisions and minority interests.

In making its move to dramatically increase the scale and geographic scope of its business, E.ON has outbid an existing offer for Endesa by Spanish gas company Gas Natural. E.ON’s bid is 30 per cent higher than Gas Natural’s, which has been approved by the Spanish government but rejected by Endesa’s board. Endesa has stated that the Gas Natural bid is too low and that conditions imposed on the deal by the government would affect the company’s value.

Following E.ON’s announcement, Italian utility Enel was rumoured to be preparing an offer for Endesa through a joint venture with Gas Natural. No official announcement or bid was made, although Enel stated that it was examining a number of opportunities for expansion abroad, including Spain. Gas Natural is now expected to wait for the regulatory reaction to E.ON’s bid before making any further moves.

E.ON-Endesa would be the world’s largest power and gas company
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The rationale behind E.ON’s bid is compelling given the two companies’ complementary portfolios of regions and businesses. The acquisition will create a company with an enterprise value of over €300bn with more than 50m customers in over 30 countries. Combined sales would total 608 TWh in power and 945 TWh in gas. Through a single transaction, E.ON would gain leading positions in the Spanish, Italian and Latin American energy markets. E.ON expects the purchase to be earnings-enhancing in the first full year.

“This transaction not only gives E.ON a new dimension but it also offers significant advantages to Endesa and its employees. The company will remain intact,” said Wulf H. Bernotat, E.ON’s CEO. “As part of a major international energy group, Endesa will give new impetus to competition in Spain. The combination of E.ON and Endesa will create a leading competitive player with operations in all key European countries. It represents an important step towards creating a single European energy market.”

If its acquisition of Endesa goes ahead, E.ON will form a new southern European and Latin American market unit headquartered in Madrid. A strong presence in Spain will give E.ON access to the rapidly expanding Iberian electricity and gas markets, and enable it to take advantage of opportunities in gas-power convergence, including the construction of new CCGT and LNG facilities. In Italy, Endesa operates 6600 MW of generating capacity, while the company’s 2500 MW of capacity in France will give E.ON a foothold in one of Europe’s less open markets.

While Endesa views E.ON’s “White Knight” bid more favourably than that of Gas Natural, it has stated that the bid still undervalues it. In addition, the Spanish government has sent clear signals that it is not in favour of E.ON’s bid, and was quick to pass a decree that increases the powers of the National Energy Commission, which will help to protect companies such as Endesa from foreign takeover.

The obvious desire of the Spanish government to create a national energy champion echoes that of France, which has obstructed the takeover of Suez by Enel by fashioning a rapid merger of Gaz de France and Suez. These moves have alerted the European competition commissioner, Neelie Kroes.

E.ON has stated that it does not believe that its acquisition of Endesa will raise any antitrust issues in Brussels because there is no geographical overlap between the two companies’ businesses (except for Italy). In addition, although its will have a significant position in the European market, it will be “far from dominant, with a market share of around ten per cent”, according to Bernotat, who also described the transaction as being part of a natural progression in the creation of a single European energy market.

But Bernotat and Kroes probably have rather different definitions of “single market”; while E.ON – and other European utilities – believes that success can only be achieved through scale, which requires home territories to be protected while expanding abroad, Kroes has expressed concern over the degree of consolidation in the European utility landscape. Europe’s dream of energy flowing freely across national boundaries, with numerous players competing on an even playing field, is far from being achieved.

For this reason, Kroes announced in February that the Commission would in the coming weeks launch a number of antitrust “crackdowns” against individual companies in Europe’s energy sector. Likely targets are E.ON, EDF and RWE in Kroes’ attempt to correct market flaws such as market concentration, transparency issues and vertical foreclosure.

So it seems quite possible that on some level, Brussels will examine E.ON’s bid for Endesa, and it has been suggested that Kroes may use E.ON’s desire to expand into Iberia as leverage for forcing it to open up its home market more.