Junior Isles, Managing Editor
Making sense of alliances and acquisitions is not always easy. For example, take the news of what has been dubbed as the “biggest alliance in the history of sport”. The New York Yankees (US baseball ‘World Series’ champions) getting together with Manchester United (English soccer fans may have heard of them) to sell each other’s merchandise and share ideas. This deal certainly had me scratching my head. Fortunately, most of the tie-ups and potential tie-ups in the European power market are easier to understand.
With the big deals in the German market all but done for now, it seems that attention is now being turned to opportunities in Spain. It looked like the first big consolidation was to become a domestic affair with the planned €13.4 billion ($12.6bn) merger of Endesa and Iberdrola. The deal would have created Spain’s biggest power company, but has now been scrapped with the blame being put on conditions imposed by the Spanish government. The main government conditions stated that:
- The new entity could not have a market share of more than 42 per cent in generation; 48 per cent in distribution; and 40 per cent of the market in power sold to industrial clients able to choose their supplier. These levels would remain in force until 2005. The reductions in market shares would be achieved by the auction of assets during a transition period lasting 10-14 months.
- Foreign state-owned companies would not be allowed to take part in the auctions.
- The merged company’s generating “mix” must mirror the make-up of Spanish power generation as a whole, split between thermal, hydro and nuclear.
- Both companies had to reduce their combined stake to ten per cent in grid operator Red Electrica, down from the current 20 per cent.
With such an extensive set of conditions, it is hardly surprising that the two Spanish giants left the table to look for growth elsewhere. Although there has been no indication as yet that anyone might now bid for one of the two giants, there has been much interest in Spain’s fourth largest player, Hidroeléctrica del Cantábrico. Germany’s RWE, Spanish engineering firm Ferroatlántica (with Germany’s EnBW) and Portuguese utility Electricidade de Portugal (EDP) have all submitted bids.
RWE has bid for 100 per cent of Hidroeléctrica at €26 per share, valuing the company at $2.9 billion. Meanwhile, Ferroatlántica and EnBW have bid €25.80 per share for Hidroeléctrica, up from its €19 per share bid in October. EDP’s €24 per share offer has the support of Spanish bank Cajastur and US energy group TXU Corp., which has 19.2 per cent of Hidroeléctrica.
The attraction of the Spanish market, certainly for the Germans, seems to be the higher electricity prices and therefore the chance for higher profit margins than they currently enjoy at home. EDP, meanwhile, sees synergies in a united Iberian power market. Spanish utilities also provide an excellent corridor to the Latin American market.
With Endesa and Iberdrola having to sell nearly half their combined assets in Spain, any buyer of Hidroeléctrica would have had an opportunity to build quickly on its small share of the market.
Commenting on RWE’s bid, Wolfgang Straßburg senior vice president of RWE’s central division of external affairs and international corporate relations said: “Buying a big player calls for a lot of money. Maybe it is better to buy a smaller company and slowly increase market share, than take the risk of buying a big fish.”
“For us, access to the final core customer is most important,” he added. Hidroeléctrica has around half a million customers in both electricity and gas, which suits a multi-utility like RWE.
And so, the tactical manoeuvres continue. For the players involved, hopefully when the dust has settled the deals will have proved to make sense.
As for the Yankees-Manchester United deal? Well this may struggle. With Man. Utd. being nicknamed ‘The Red Devils’, maybe for their joint marketing plan they could draw inspiration from the old film (I think from the 50s or 60s) called ‘Damn Yankees’ where an ex-baseball player sells his soul to the devil in a bid to recapture his youth. If you have any other inspired marketing plans for this transatlantic alliance, please email them to me and I’ll be sure to pass them on.