Give and you shall receive

Jesus may have said it as advice on how we should conduct our daily lives. In business there is a similar phrase – even if the philosophy is different – give in order to receive. We call it negotiation.

Two of the world’s great negotiators – France and Italy – have been locked in talks for months now over the future direction of their electricity giants Electricité de France (EDF) and Enel. The recent discussions are in fact the culmination of a dispute that has been simmering for the last four years.

In 2001 EDF purchased a stake in Italian power producer Edison in an effort to enter the Italian power market. In return, Enel hoped to gain a position in the French market. As part of the deal, however, the Italian government passed a decree limiting EDF’s voting rights in Edison to two per cent. The first rule of negotiation: give, but not too much too soon. The cap was put in place on the grounds that France was essentially still a closed market while other markets were open.

Certainly it was a slick move by the Italians; a move which now puts EDF in a delicate position. When EDF purchased its stake in Edison, to secure the backing of its partners EDF said it would buy them out of Italenergia (the holding company of Edison) in 2005. It was reported that within the coming weeks, Fiat and three Italian banks – EDF’s Italian partners – would force EDF to buy their shares. This would push EDF into a costly takeover of a company in which it had limited voting rights. But perhaps more important is the financial burden. The cost of assuming Edison’s debt and buying out all minority shareholders would be €12-€14 billion ($15.7-18.3 billion) according to EDF’s estimates. With privatization planned for later this year, a weak balance sheet and looming pension payouts, it is a takeover that EDF can ill-afford.

Yet if the Italians can be described as slick, the French are known to be resolute. EDF has said that if the cap is not lifted it will withdraw from Italy. The second law of negotiation: be prepared to walk away. Certainly EDF could withdraw, even if it has much to lose. Italy is important to its European strategy. It is one of Europe’s most attractive markets. Generating capacity is tight with demand growing at about two per cent per annum – higher than the European average of about 1.5 per cent. Also, electricity prices are significantly higher than in other countries. The average price of electricity in Italy is €54/MWh compared to €34/MWh in France and €45 in the UK. If EDF is forced to pull out of Italy, some fear it may be forced to withdraw from other markets such as Germany.

Nevertheless, EDF may follow through with its threat. Already it has invited bid offers for all or part of its interests in Italenergia. In the last two months there has been high interest in Edison. According to reports, some ten bidders have put in indicative offers and Spanish utility Endesa confirmed it had indicated an interest in buying all of EDF’s Edison stake. Of the bidders, a consortium led by Milan utility, AEM, is the favourite.

Further, EDF has more to offer than just idle threats. At the beginning of May, both sides thought the dispute was finally resolved when the Italian government agreed to remove the limit on voting rights. Industry minister Claudio Scarjola was reported as saying: “This accord will permit reciprocity and interesting investments for Italians in France.”

The deal was expected to be “completed” by an industrial partnership between EDF and Enel aimed at helping Enel gain access to EDF’s nuclear technology. This is expected to include Enel investing in a new generation of nuclear reactors being prepared by EDF. Enel is eager to buy nuclear capacity, which was banned in Italy following Chernobyl. It is also believed that EDF would agree to allow Enel to build two combined cycle power stations on its nuclear sites and to supply the Italian company with 1000-5000 MW of peak power at market prices.

In the latest development (as of May 18) both sides have agreed to delay the agreement. The third law of negotiation: when the deal is ‘agreed’, there may be a time of reflection to determine if you are satisfied with the outcome or whether you need to come back to the table with any minor issues. EDF said that the finalization of the accord required a number of checks, notably the consequences of a progressive creation of an Italian electricity market, and developments in the French market over the coming months.

With negotiations well on the way to reaching a conclusion, the Italians must be pleased with the way things are turning out. It’s a shame (for the Italians) that AC Milan could not negotiate its way past that great bastion of English football, Liverpool.

Junior Isles,
Publisher & Editorial Director

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