French and Spanish companies are in advanced discussions about pursuing a tricky $100 billion deal in the Spanish utility industry that could reshape the European energy landscape.
Électricité de France SA (1024251.FR), one of Europe's largest utilities, is in talks about forming a bidding duo with Actividades de Construcción y Servicios SA (ACS.MC), a Spanish construction company. The team would make simultaneous bids for two of Spain's largest utilities - Iberdrola SA (IBDRY), the country's largest by market value, and Unión Fenosa (UNF.MC), the third-largest, according to people familiar with the matter. Adding debt, the combined value of the transactions would be about $134 billion, not including any premium the buyers might pay.
People close to the discussions caution the deal is far from certain. They say it may take a much different shape than what is currently being considered. EdF is controlled by the French state, and the Spanish government is wary of French involvement in the power sector. In addition, regulators in any number of jurisdictions may try to stop it, and Iberdrola may oppose a deal that would deprive it of its independence.
Spokesmen for the Spanish companies involved declined to comment. An EdF spokeswoman said the French company was willing to "play a role" in a restructuring of Spain's energy sector but would only make a move if it were "welcomed by Spanish authorities." Major Consolidation Europe's power industry has undergone major consolidation in recent years. The European Union has tried to usher competition into an industry once dominated by state-owned monopolies. Over the past decade it has tried to crack open the market, allowing a power producer in France to sell power in Spain, and an Austrian company to sell power in Italy. To create space for new players, it capped the market share of the older incumbents in their home markets.
That's left companies contemplating a list of once-unthinkable cross-border configurations. Spain is attractive to EdF because it is seeking expansion in neighboring countries to offset losses at home to new competitors. Iberdrola, which has a market value of about $79 billion, is one of Europe's biggest utilities, with assets that include Scottish Power in the United Kingdom. It is also involved in the U.S., where it where it owns PPM Energy, the country's third-largest wind power producer. Iberdrola also hopes to close a deal to acquire Energy East Corp. (EAS) in the Northeast U.S.
Under the plan being considered, EdF would bid for all of Unión Fenosa, including a 45% stake now owned by ACS. Unión Fenosa's market value is about $20 billion.
ACS, in turn, would acquire all of Iberdrola and break it up. It would sell Scottish Power, which is worth about $23 billion, and other units to EdF. Under another scenario being discussed, EdF, ACS and a third company, E.On AG (EONGY) of Germany, would set up a vehicle to acquire Iberdrola and split up the assets later.
The re-election of a Socialist government in Spain earlier this month may favor more deal-making there. Prime Minister José Luis Rodríguez Zapatero has hinted he won't oppose cross-border deals.
Speculation has surrounded the makeup of Spain's energy sector since EdF acknowledged its interest in investing in the country last month.
Worsening credit conditions have hit ACS and other companies in Spain's construction sector. That could encourage ACS to make a deal that would enable it to pay down some debt. The company is the top shareholder of both Iberdrola and Unión Fenosa, with about 13% and 45% stakes, respectively.
A person familiar with EdF said the French company held preliminary talks with ACS and looked into several scenarios, including one under which EDF would acquire an interest in Unión Fenosa from ACS.
The person, however, said EDF continued to plot its strategy carefully because of political obstacles in Spain. EDF, the person said, has two potential trump cards: expertise in nuclear power and capacity surplus. Spain might be interested in learning from EDF's nuclear experience and needs more imports to meet growing power demand.
At a news conference in Brussels last week, French President Nicolas Sarkozy said he was in close contact with the Spanish government to discuss energy issues and added that the two countries were trying to find "consensual solutions."
Another factor in the proposed deals is the fate of Iberdrola's $4.5 billion planned acquisition of New York utility Energy East. It has been approved by federal and some state regulators but faces an uncertain future in New York. The deal's failure would make it easier for the Spanish utility to be sold because neither EdF nor ACS is interested in owning a U.S. utility, and regulators in the U.S. might not accept them anyway.
Staff of the New York Public Service Commission has expressed unhappiness with terms of the deal, feeling it provides too little benefit and somewhat greater risk to customers.
Commission staff also worried that the U.S. utilities could become pawns in some larger contest involving Iberdrola and has looked at "ring fencing" as a mechanism to quarantine the regulated utilities from any future financial difficulties of a parent company, said commission spokesman James Denn. A similar structure was created last year when Britain's National Grid PLC (NGG) acquired KeySpan, another New York utility, he added.