Global Insight Perspective | |
Significance | Electricité de France (EDF)'s and ACS's discussions on a possible takeover of Spain's Iberdrola have reportedly expanded to encompass the additional takeover of Unión Fenosa. |
Implications | The move, if pursued, would entail a radical restructuring of the Spanish power sector as well as possible consolidation in the United Kingdom, where EDF could merge with its competitor Scottish Power. |
Outlook | The ambitious plan remains only at a formative stage, however, and would be likely to meet considerable opposition from the Spanish government and a thorough examination by the European Commission (EC) if it were to be put into action. |
Grand Plans
As competitive pressures in the European energy market intensify, so too it seems are the expansion plans of the region's major energy players reaching new heights.
In January, French power giant EDF and Spanish construction group ACS acknowledged that they were holding talks on a possible takeover bid for Spain's largest generator by market capitalisation, Iberdrola (see Spain: 30 January 2008: EDF, ACS Mull Joint Bid for Iberdrola; Iberdrola to Sell 4% Stake in Galp Energia). Iberdrola quickly condemned the move, suggesting the French government's control of EDF meant the power giant would be unwelcome as a dominant shareholder, and began a process that has now become all too familiar in Europe: of erecting barriers to a possible takeover bid. The Spanish group lodged a series of complaints with the EC over the French government's control and support of EDF, seeking to demonstrate it would not be an easy target should EDF's takeover plans come to fruition (see Spain: 19 March 2008:Iberdrola Files New Complaint over EDF).
However, Iberdrola's defensive actions appear to have done little to deter EDF's and ACS's plans. In fact, reports in the Wall Street Journal on Friday (21 March 2008) suggest the companies' discussions have reached a new level of ambition. The paper, citing informed but unnamed sources, has suggested EDF and ACS have now held talks on the possibility of launching a takeover for not only Iberdrola, but also its Spanish competitor Unión Fenosa; a deal that would be worth almost 90 billion euro (US$140 billion). The arrangement would see ACS, which currently owns 13% of Iberdrola, launch a full takeover of the company, after which it would divest agreed assets to EDF. Among the assets reported to be transferred is Iberdrola's recently-acquired U.K. subsidiary Scottish Power. EDF, meanwhile, would oversee a bid for Unión Fenosa, the third-largest power company in Spain, with a value of around 13 billion euro. ACS already holds a 45% stake in Unión Fenosa. The combined deal would be the largest ever cross-border acquisition in Europe's energy sector, surpassing the takeover of Endesa by Italy's Enel and Spanish construction group Acciona last year, a transaction that looks to have been used as the model for EDF's and ACS's plans.
The Wall Street Journal also reported that an alternative set-up could see Germany's E.ON enter the deal as the purchaser of Iberdrola, with such a scenario also likely to see the Spanish group's assets divided up. E.ON has well-known ambitions to enter the Spanish market, getting beaten out at the last minute by Enel and Acciona in its efforts to acquire Endesa last year.
Outlook and Implications
The plan described represents a new level of ambition in the ongoing merger and acquisition activity in Europe's energy market. However, while the successful execution of such a plan would no doubt prove difficult, the 43-billion-euro takeover of Endesa carried out last year has served to demonstrate that acquisitions on such a scale are indeed possible. Still, the hurdles to overcome would be numerous and challenging.
Firstly, Iberdrola's opposition to a takeover involving EDF would make any takeover hostile, suggesting the French company and its Spanish partner would need to win over Iberdrola shareholders with sheer financial clout, rather than through a reasoned and mutually agreed case for building value. Unión Fenosa has yet to voice its perspective on the reported deal, but it would be likely to resist the dividing up of its assets, indicating that EDF and ACS could also face substantial opposition in relation to this aspect of the deal.
Secondly, the Spanish government has shown itself to be keen to retain the country's energy assets in Spanish hands and ready to erect regulatory hurdles should this be threatened, whether such actions breach European Union rules or not. As such, it is difficult to see such a significant deal being carried out without the approval of the Spanish government. EDF and indeed the French government appear to have recognised this point. French President Nicolas Sarkozy indicated last week he was in close contact with the Spanish government on finding "consensual" means of enhancing co-operation between the two countries in the energy sphere. To win the approval for such an encompassing deal, France would have to offer significant concessions, potentially including access to assets in its own home market. EDF may therefore find itself having to trade off its own domestic market share if it wishes to boost its role in the Spanish market.
Thirdly, such a significant cross-border deal would certainly face close scrutiny by the EC. EDF's and ACS's plans to divide up assets may avoid the accumulation of a dominant position in the Spanish market, but this would be a point the EC would be very careful to establish, and the groups could find themselves having to carry out divestments of their own assets to meet regulatory approval. The U.K. market could present a problem should the EC determine that EDF's acquisition of Scottish Power, as is reportedly planned under the deal, lead to a reduction in competition. With EDF delivering energy to five million customers in the United Kingdom it already holds a strong position and its takeover of one of the other "big six" energy firms is highly likely to face stringent conditions, if allowed at all.
As such, EDF's and ACS's reported plans for the Spanish power market remain at an early stage and much discussion, negotiation, and analysis would need to take place before even an initial offer is tabled. If the companies are indeed intending a grand takeover of the Spanish power sector such as that described by the Wall Street Journal, they will have many months and possibly years of work ahead of them to see their plans realised. What the events have served to demonstrate is that, with competitive pressures building and with bulging coffers from increasing energy prices, European utilities are quite clearly raising their expansion ambitions accordingly. Only time will tell if there is substance to the recent reports on the takeover of the Spanish market, but there are sure to be further such reports and deals arising as the region's major players seek to secure their future growth.