Poland’s state treasury announced in August that it had granted Spanish utility Iberdrola exclusive rights to negotiate for the purchase of the G8 group of distribution utilities. Iberdrola reportedly bid $400m for a 25 per cent stake in G8, touted by analysts as being a highly strategic asset.
Iberdrola fought off competition from Electrabel, E.ON Energie and a Polish consortium led by Elektrim. Other companies reported to have been interested in the sale include Endesa and ESBI, although neither of these placed final bids in June.
The sale of a 25 per cent stake in G8 is part of the Polish government’s plans to privatize the energy sector under the Energy Act of 1997. The power sector has already been restructured and some power generation and distribution assets sold.
G8 is the second power distributor to go on the block following the sale of Upper Silesian distributor GZE in December 2000. Also known as the ‘Northern Group’, it is the country’s largest electricity distributor with a market share of 16.3 per cent and sales of 16.5 TWh per year to around 2.6m customers.
Given its size and customer base, G8 is one of the most prized assets in Poland’s power privatization scheme, which is due to be completed in 2002. It covers the areas of Gdansk, Torun, Slupsk, Plock, Elblag, Olsztyn, Kalisz and Koszalin, and is well positioned in a number of ways.
In its territory, G8 has the second largest power generator, Elektrowni Patnow-Adamow-Konin (PAK), as well as the SwePol subsea power cable. It will give Iberdrola competitive advantage over other players in the Polish power sector, and will also be a strong foothold in this regional market.
Poland is an attractive market for investors in many respects, according to Andreas Zsiga of Standard & Poor’s. In terms of its economy, population, geographical size and industrial output, Poland is a large market – certainly the largest in central and eastern Europe. It is also one of the most advanced among the transition economies, eliminating some of the country risks usually associated with this part of the world.
Poland has a geographically strategic location, says Zsiga, and is closer to key economies than other east European countries. “It borders continental western Europe, Russia and eastern Europe, so it is well located as a transit country for future supplies of electricity into western Europe.”
Poland’s efforts to reform its market and introduce competition is also attractive to investors, who, says Zsiga, can be confident that regulatory transparency and electricity tariffs will increase to give players a sound profitability. “In many other transition economies, regulatory risk is quite high,” says Zsiga, “but in Poland the regulatory framework is clearer.”
The importance of Poland to major European market players can be seen in the fact that Electricité de France (EDF) and Sweden’s Vattenfall have targeted the country’s power sector and have operated successfully there. EDF participated in the country’s first power privatization project, and owns holdings in generating companies ECK-SA, ZEcW SA and Kogenracja.
Poland is of particular strategic importance to Vattenfall due to its proximity to the country’s core markets, which now include significant holdings in Germany. In 2000 Vattenfall took a 55 per cent stake in power and district heating generator Elektrocie-plownie Warszawskie SA, and in 2001 bought a stake in GZE, the first Polish power distributor to go on the block.
Poland’s proximity to Germany, western Europe’s largest power market, is of particular importance to investors such as Iberdrola, as it gives them a springboard for entry to the German market.
In addition, assets in Poland are easier to acquire than those in Germany. “They come at a much lower price than assets in Germany and you can usually gain larger stakes,” notes Zsiga. “You also have to remember that a lot of utilities in Germany are fairly small, but by acquiring G8 you can get a fairly big chunk of the Polish market. So I would say that most companies probably consider [the sale of G8] to be a good opportunity to get a strong foothold in a strategic market.”
If it succeeds in its bid, Iberdrola will undoubtedly have to invest in the distribution infrastructure in G8’s northern territory. In purchasing Elektrocieplownie Warszawskie, Vattenfall made a commitment to invest $650m over ten years to modernize the company’s plants.
“At all levels of the electricity supply chain there is a need to invest and there is often an investment requirement tied into the [privatization] agreement. So the acquirer will commit to invest in … upgrading the distribution network,” says Zsiga. “In this respect you have to calculate the trade-off between the purchase price and the investments needs.”
Another investment which Iberdrola may have to make is the purchase of a generator as a condition of buying the G8 stake. In March 2001 the Treasury changed the conditions of the tender, requiring that prospective investors in G8 also place bids for one of four generators slated for privatization.
While changing the rules halfway through the tender surprised investors, vertical integration is an attractive prospect. The four generators include Stalowa Wola, Ostroleka, Kozienice and Dolna Odra. Dolna Odra, which supplies 4.7 per cent of the domestic market and recorded profits of $22.1m in 2000, is thought to be Iberdrola’s most likely choice.
“Vattenfall … is hoping to integrate its [generation and distribution] operations more closely,” says Zsiga. “In most markets there are benefits to having a vertically integrated operation. If Iberdrola went in that direction, it would be a strategically logical step.”