The future of Spain’s energy sector is a landscape filled with unknowns. Experts say that the big Spanish construction companies have inherited the traditional role of banks in big industrial enterprises, and that they have become tougher. Recent examples involve two construction firms, Acciona and ACS. Acciona, headed by José Manuel Entrecanales, has purchased 10% of Endesa, the electricity firm, with the help of Banco Santander. Meanwhile, ACS, backed by loans from BBVA bank and BBK, a savings bank, is about to acquire 10% of Union FENOSA, the electricity company. Entrecanales and Florentino Perez, respectively presidents of Acciona and ACS, belong to a generation that, through one stroke in a checkbook, buys lots of kilowatts, no matter how much that may cost.
There is a common reason behind all these moves. Construction companies want to take control of Spain’s largest utility companies because the utilities are a machine that makes lots of money. Between Endesa, Iberdrola and Union FENOSA alone, the sector pocketed €5.3 billion in profits last year. That amounts to €3.173 billion more than all of the construction firms combined – Acciona, ACS, FCC, Ferrovial, Sacyr Vallehermoso and OHL. Juan Ignacio Sanz, a law professor at Spain’s ESADE business school, says that the construction companies’ motive for plunging into the energy sector probably involves several factors. “Diversification, anticipation of a change in the construction and real estate businesses; a greater desire to generate added value and also get into a business that has attractive growth rates in the future and where prices will surely have to be raised, even if only a bit,” says Sanz. He adds that he is “almost certain that we are facing a change in the traditional business cycle in those sectors.”
According to the experts, construction companies and real estate developers need to diversify their investments because of a possible cyclical change in their traditional businesses. “The Spanish construction and infrastructure service companies have a very healthy cash flow, and they are looking for opportunities to diversify before a possible change in the economic cycle,” explains Mauro Guillén, a management professor at Wharton. “The big construction companies know how to negotiate with the government, which is a skill that is also very useful in the world of energy.”
This much is clear: The business cycle in the construction sector can change at any moment. “Already, a slowdown is taking place in the growth of prices and even a stabilization [of prices]. Energy in general and electricity in particular, will continue to grow because the GDP and the population are continuing to expand,” says Guillén.
The Real Estate Sector, Too
This trend could become even more pronounced if Manuel Jove uses the €2.2 billion that he is going to get from his sale of 55% of Fadesa, a real estate firm, to strengthen his ownership in Union FENOSA.
Market sources are certain that Jove will use part of the funds that he gets to exit the real estate market and increase his presence in the energy sector. Jove, who is currently president of Fadesa, would play a key role in the negotiations for a merger between Union FENOSA and Iberdrola, something that has been urged by ACS, the main shareholder in both those companies. A merger between Iberdrola and Union FENOSA would create the largest electric utility in the country, with a market capitalization of 42 billion euros, 26 million customers, and more than 28,000 employees. ACS has spent more than seven billion euros in making its moves.
Which plan would have more benefits for consumers? The consumer, says Guillén, can benefit if Spanish “construction firms, which are so efficient and well-organized, efficiently transfer their management know how to the electric utilities.” It should not be forgotten that the big Spanish electricity firms spent decades under a regime that was highly regulated and not innovative. “Conditions have changed in recent years, with greater deregulation and competition,” continues Guillén. “Some of the companies, such as Iberdrola, have innovated and achieved major international success.” Nevertheless, Guillén believes that it is hard to see any benefit for consumers when all indicators reveal that “there is a trend toward greater concentration and a reduction in the number of operators in the market.”
Experts see Acciona’s purchase of 10% of Endesa as a diplomatic gesture that pleases everyone. Acciona has saved the government of José Luis Rodríguez Zapatero from being condemned by the European Commission because of the obstacles the government established to thwart the takeover [of Endesa] by Germany’s E.ON. The government had given the National Energy Commission (CNE), its regulatory agency, power to veto purchases. However, the conditions that it established for restraining E.ON were declared illegal by the European Union. The move by Acciona took place one day before the final legal verdict was made in Brussels. Ultimately, the news leaked that 10% of Endesa was being sold for 3.3 billion euros.
At the time, the brokers at Santander [bank] were already buying shares of Endesa from large shareholders for a price of 32 euros per share. Objective completed. Acciona had committed itself to buy an additional five percent of the electric utility back in September. Its goal was to take over at least 20% of the company’s capital but not to go beyond 24.9%, which would require Acciona to launch a takeover offer [for Endesa]. Guillén says that “Acciona has many reasons for trying to achieve synergies with an electricity company. I think that Acciona is a company that is much more dynamic, successful, and forward-looking than E.ON. Despite everything, E.ON is itself still the product of a merger of two German dinosaurs, and we still don’t know what the outcome will be in terms of competitiveness and profitability. However, in the case of Acciona, its plan looks like a good one, even if we do not have all the details.”
According to market sources, Entrecanales is going to initiate a round of contacts with E.ON and the rest of the major investors in Endesa in order to reach an agreement about management. CNE has another month to issue a report about Acciona’s participation in Endesa. With this 20%, Acciona would double the participation that Caja Madrid, a financial institution has in Endesa.
The Road Followed by ACS
ACS has begun to lay the groundwork for creating Spain’s largest electricity company. ACS, a construction company headed by Florentino Perez, has revealed to several financial institutions that are its shareholders that it wants to purchase 10% of Iberdrola for a price of €3.335 billion (37 euros per share). According to experts, the ultimate goal of the deal could be the merger of Iberdrola with Union FENOSA, in which ACS owns 35% of the shares.
ACS’ increased ownership [in Iberdrola] would make that construction company the arbiter of any possible corporate move involving a second or third Spanish electricity company. If a merger took place, it would create an institution with a market value of about 45 billion euros, in which ACS would have 15% of the shares. After the takeover of Iberdrola, the value of ACS’ total investments in the electricity sector – including its ownership in FENOSA – would rise to €6.5 billion. As a result, the market capitalization of ACS, a construction and services company, would be €12.943 billion.
A Future Full of Unknowns
The future of the energy sector is full of unknowns. Experts say that the moves made by ACS and Acciona are taking place at a time of tension in the energy sector, and that they reflect the Spanish government’s fear that the major utility companies will fall into the hands of foreign companies. E.ON, the German company, has initiated a take-over offer for Endesa.
That could make things difficult for Acciona, which already wants to acquire up to 24.9% of Endesa’s shares. When E.ON found out about that, it raised the price of its takeover offer [for Endesa] by 37.8% to 35 euros per share to eliminate resistance. “The share price has gone up a lot since the announcement of a takeover offer by Gas Natural but that’s not what really matters,” says Guillén. The crucial thing, he explains, is “if someone offers a higher price than the market price, even following the run-up of prices during the last 12 months, it is because they thinks that they can manage the company so much better, and that will compensate for paying a higher price.”
Perhaps this sector could wind up suffering from the “contagion effect.” The other construction and real estate firms might also place their bets on buying a portion of the energy sector. “I believe that only Acciona and ACS are going to get into the energy sector,” says Guillén, however. “FCC, Sacyr and Ferrovial are more interested in expanding their activities into other sectors” rather than energy. Nor does Sanz believe that the contagion will spread because “the number of players who could be taken over will decline and they will establish mechanisms that protect them from hostile takeovers.”
In the case of Iberdrola, analysts were speculating recently about a possible takeover offer by Enel, an Italian company. The fact that ACS has become a shareholder in Iberdrola enables ACS to become an arbiter in this situation. Another alternative that could stand in the way of Enel’s intentions would be a future merger between ACS and FENOSA.
Nevertheless, sources close to ACS, FENOSA and Iberdrola disagree about the likelihood that there will be a merger between the two utility companies [FENOSA and Iberdrola]. Most experts warn that a great deal of loose ends remain to be tied up. One of the most significant loose ends involves the financial terms of a merger and power-sharing in the boardroom room and on the management team. The companies also have to prepare a strategy for dealing with regulators who might require the new company to sell some of its assets on the Spanish market.
Together, FENOSA and Iberdrola would have a combined market share of 45% in the electricity generation business (compared with Endesa’s 40%). The new company would also have 50% of the distribution business (compared with 39% for Endesa) and 20% of the gas market (compared with 50% for Gas Natural and 8% for Endesa.)
Only time will tell if the other big construction companies let themselves become infected by the “kilowatt effect,” and how the Spanish energy sector will wind up looking in the future.