Europe’s new hot spot

While focus in Europe’s liberalizing electricity markets has been concentrated on Germany in recent months, TXU’s bid, and Uniàƒ³n Fenosa’s counter bid for Spanish utility Hidroeléctrica del Cantabrico (Hidrocantabrico) suffered a serious setback after a counter-offer for the utility was made by Spain’s Uniàƒ³n Fenosa.

US energy group TXU’s hopes of expanding its European portfolio with its euro2.4bn ($2.3bn) cash bid for Spain’s Hidroeléctrica del Cantabrico (Hidrocantabrico) suffered a serious setback after a counter-offer for the utility was made by Spain’s Uniàƒ³n Fenosa.

TXU’s March 13 offer for Hidrocantabrico is the first takeover bid for a Spanish power company by a foreign player and immediately sparked speculation of a counter bid for Hidrocantabrico by a Spanish player. Uniàƒ³n Fenosa quickly obliged with a euro2.7bn bid – a 13 per cent premium over TXU’s bid.

TXU offered euro21.25 per share, a 13 per cent premium to Hidrocantabrico’s closing share price of 10 March. Hidrocantabrico’s share price rose ten per cent on the news, and other Spanish utility share prices also responded positively. The euro21.25 per share offer was also a 50.2 per cent premium on Hidrocantabrico’s average share price of the last eight weeks, reflecting speculation of takeover activity in the Spanish power market. This speculation was compounded by activity in the run-up to the March general election, which saw the pro-liberalization Popular party win a second four-year term.

Uniàƒ³n Fenosa is offering cash and equity worth euro24 per share. As PEi went to press, TXU had not raised its offer, and said that the major shareholders of Hidrocantabrico were due to meet on 27 March to consider both bids. The US company stressed that a takeover by Uniàƒ³n Fenosa of Hidrocantabrico would raise competition issues in the Spanish power market. Spanish prime minister Jose Maria Aznar wants to promote competition in the energy sector and is reportedly keen to see the dominance of the four main electricity companies – Iberdrola, Endesa, Hidrocantabrico and Uniàƒ³n Fenosa – kept in check by new entrants.

The deal is subject to approval by the European Commission and the Spanish Securities Exchange (CNMV). The board, which controls 40 per cent of Hidrocantabrico’s shares and includes two seats held by TXU, must also give unanimous backing for a bid to be accepted according to so-called ‘poison pill’ bylaws. Uniàƒ³n Fenosa may find a stumbling block here, but says that it already has the backing of four major Hidrocantabrico shareholders holding 20 per cent of the shares.

TXU’s bid is the largest in Europe by the Houston-based energy group since it paid $7bn for Eastern Group of the UK. A takeover of Hidrocantabrico would increase TXU’s installed generating base to 11 500 MW, and, says TXU, increase its earnings by à‚¢10/share.

TXU has driven an aggressive growth strategy in Europe since its acquisition of Eastern (now TXU Europe) in 1998. Its strategy of building up a portfolio of assets across Europe’s liberalizing markets has seen it implement trading activities in the UK and Scandinavia and establish partnerships in the Czech Republic, the Netherlands, Sweden, Spain and Finland. It already holds a five per cent stake in Hidrocantabrico, which it purchased in 1998. A successful bid by TXU would also give it access to Spain’s natural gas market which is set to liberalize later in 2000.

A successful bid by Uniàƒ³n Fenosa would strengthen its position in its home market. Uniàƒ³n Fenosa is Spain’s third largest integrated electricity company and Hidrocantabrico the fourth. With the onset of an increasingly deregulated electricity market and tougher competition, a high-volume business will enable it to cope with reduced margins.

Hidrocantabrico supplies 90 per cent of electricity demand in Spain’s northern Asturia province. It accounts for 7.3 per cent of Spain’s electricity generation and five per cent of the retail market. It supplies electricity to 520 000 electricity consumers and has 115 000 gas customers. It has an installed capacity of 2100 MW and is diversifying into gas-fired CCGT generation.

A strong foothold in Spain is an attractive prospect for TXU, as is a stronger position in its domestic market for Uniàƒ³n Fenosa. Spain is the fifth largest electricity market in Europe and is also one of the most liberalized. The country’s 1997 electricity law paved the way for deregulation faster than required by the EU directive and the market is currently 47.5 per cent open with around 9000 eligible industrial consumers.

It has a competitive wholesale market with a power pool similar to that of the UK and has implemented third party access. Competition in generation has led to a ‘dash for gas’, with 22 CCGT proposals made and 14 450 MW of new gas fired capacity due on line in the next three years.

By July 2000, virtually all industrial consumers will be eligible to choose supplier and the market will be fully open by January 2007. However, the prime minister’s commitment to liberalization and encouraging foreign players could mean that the retail market could be opened faster than planned.

Spain therefore offers foreign and domestic players a great deal of opportunity. However, increased competition in generation and supply and the presence of new entrants will mean that it will develop into a tough market. The only respite is the fact that it is a fast-growing sector with electricity demand increasing at around six per cent per year.

Traditional utilities in Spain will see their margins squeezed and will need to develop new strategies in marketing and trading to maintain their positions. Analysts have forecast a wave of restructuring and consolidation like that seen in Germany and the UK as utilities cut costs and seek to maximise their efficiency.

One outstanding issue is stranded costs. Spain’s government has allowed the four energy majors to recoup the costs of past investments through electricity tariffs. But this policy has been frowned upon by the European Commission, which sees it as a subsidy. The Commission is still reviewing the situation and is due to make a ruling soon. A ruling against Spain could have a negative impact on all of the four major utilities.

Both TXU and Uniàƒ³n Fenosa can offer Hidrocantabrico experience of operating in deregulated markets and trading activities, and both have strong motives for their moves in the Spanish market. With TXU holding two seats on the board, it could be a long battle ahead.

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