Europe utility mergers wane amid spats over control


BERLIN, Nov. 20, 2000 (Bloomberg) à‚– It was supposed to be the year of the merger for Europe’s utilities, with deregulation of the $227 billion electricity industry prompting companies to get bigger and protect themselves from increased competition.

Instead, plans for mergers have been scrapped as executives disagreed over control. The average transaction involving a European utilities target has fallen to $741 million this year from $1.13 billion in 1999, Bloomberg data show.

“Plans for big mergers have been thrown in the garbage can,” said Thomas Deser, a fund manager at Union Investment in Frankfurt, who helps manage 30 billion euros in stocks.

Suez Lyonnaise des Eaux SA of France and E.ON AG, Germany’s biggest utility, scrapped talks about a merger worth at least 37 billion euros ($32 billion) in September after failing to agree on the share each would get. Vivendi SA rejected a 30 billion-euro offer for its utility unit from RWE AG.

Last year was the biggest for European utilities acquisitions, with $34 billion worth of transactions, as companies sought purchases to help counter falling market share. Hopes of even larger deals this year prompted Goldman Sachs Group Inc. and Schroder Salomon Smith Barney to double the number of staff working on utilities mergers over the past two years.

Calling It Off

The biggest potential mergers this year were called off. E.ON, created from Veba’s $14 billion acquisition of Viag, was in talks to merge with Suez for most of the year, a combination analysts and bankers had expected to spark more transactions.

As well as disagreeing with E.ON over ownership of the combined company, Suez Chief Executive Gerard Mestrallet said the French company didn’t want to add another business, like E.ON’s chemicals division. “We’ve turned the page,” Mestrallet said. “There are no discussions with anybody about a global merger.”

Vivendi Chief Executive Jean-Marie Messier rejected a 30 billion-euro offer from RWE for the French company’s water, waste and energy business, opting instead to sell part of the unit in an initial offering that raised 2.5 billion euros. Vivendi, expanding in media with its $33 billion purchase of Seagram Co., was eager to keep hold of the utility unit’s cash flow.

The biggest transaction involving a European utilities target this year will probably be Endesa SA’s $13.2 billion bid for Iberdrola SA, a Spanish rival, though that could have been even bigger if Repsol-YPF SA had pressed ahead with plans for a counter offer for Iberdrola.

Regulatory Snags

RWE’s $9.8 billion purchase of Thames Water Plc is the second- largest transaction and the biggest cross-border purchase involving a European utilities target so far this year. It’s less than one third of a would-be Suez-E.ON combination.

“M&A activity will continue, but on a smaller scale,” said Lueder Schumacher, an analyst at Deutsche Bank AG in London. “For now, the large alliances and mergers have been put on the shelf.”

Regulators, concerned that mergers and acquisitions may put at risk the increased competition they’re striving for with deregulation of the region’s electricity market, have also scotched some transactions this year.

The Spanish government, which still has to approve Endesa’a planned purchase of Iberdrola, blocked Union Electrica Fenosa SA’s 2.7 billion-euro bid for the country’s fourth-biggest power supplier, Hidroelectrica del Cantabrico SA, saying it doesn’t want the number of power suppliers to fall below four.

Electricite de France, France’s state-owned electricity company, is waiting for European Union approval of its $2.1 billion acquisition of a quarter of Germany’s third-largest power supplier, EnBW AG, almost a year after agreeing on the terms. EDF still controls more than 90 percent of the French power market and the EU has criticized France for dawdling on deregulation.

Asset Swaps

To help avoid regulatory scrutiny and time-consuming negotiations over large mergers, utilities are increasingly looking to assets swaps as a way of expanding abroad.

To win antitrust approval for its takeover of Iberdrola, Spain’s second-biggest power company, Endesa has to sell assets about the same size as Iberdrola and wants to exchange power plants and customers for similar assets in other countries.

E.ON, which said last week it’s abandoned talks to buy two foreign water companies, opted to sell its 49 percent stake in Berlin’s dominant utility to Sweden’s Vattenfall AB rather than Southern Co. because the U.S. company offered only cash, while Vattenfall agreed to swap holdings in a Swedish power company and a German natural gas supplier.

Analysts expect E.ON, Suez, Endesa and RWE to compete for assets and acquisitions in coming months and may revive the merger plans of this year in another 12 months.

“I don’t think someone like E.ON is going to remain alone forever,” said Virginie Hache, an analyst at KBC Securities in Paris. “Capacity swaps are insufficient for E.ON to develop a multi-utility strategy.”

Below are the five biggest transactions of this year involving a European utilities target, according to Bloomberg data:

Acquirer Target Price Endesa SA Iberdrola SA $13.2 billion RWE AG Thames Water Plc $9.8 billion Southern Co., PPL Ltd. Hyder Plc $3.7 billion Glas Cymru Dwr Cymru $2.6 billion EnBW AG Neckarwerke $1.9 billion

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