Iberdrola has become a target. Spain’s largest electricity company, measured by market capitalization, could become the object of a joint takeover offer by EDF, the French electricity company, and ACS, the Spanish construction company. Such a deal is part of the consolidation of the European and global energy sector, and it has explosive possibilities for Spain’s electricity industry. The calm that seemed to have settled on the industry following the purchase of electricity provider Endesa, by Acciona, the construction firm, and Enel, an Italian electricity firm, has faded away.


Nevertheless, launching a hostile attack on Iberdrola is not easily accomplished. The company has armor-plated its capital structure with the usual array of voting limitations. No shareholder can exercise voting rights beyond 10% of the company’s total shares, even if he or she owns more shares than that. This is the identical defense mechanism that Endesa used, and that barrier was one of the key factors that decided the outcome of the battle for the company. “It’s not easy to do, considering that this is a strategic sector with managed prices in which publicly quoted companies have clauses for limiting voting rates and agreements about share syndication,” says Juan A. Maroto, professor at the Complutense University in Madrid. “In addition, there is a short-term factor: General elections are coming up [on March 9] and we will have to wait and see what position the government takes after the polling.”


The successive takeover offers aimed at Endesa have attempted to put a crack in that armor plating. To do that, the corporate statutes had to be changed, and a board meeting had to be convened that would vote in favor of making changes regarding the percentages. This is where there is a big difference between Endesa and Iberdrola. “This could be a serious problem if the limitations on voting are the sort of thing that [Endesa] had, and which Hidrocantabrico, another Spanish electricity company, [currently] has in place. These limitations were impossible to overcome, although in this case, you would have to see how the distribution of the votes would turn out after the takeover offer won out.”


In principle, it is irrelevant whether or not the company is protected from a takeover. What matters is whether Iberdrola shareholders win or lose as a result of this deal. Every finance textbook says that when a company protects itself, what it is protecting is the managerial team –and the minority shareholders who want to continue managing without collectively owning more than 50% of the company’s capital, notes Juan Mascareñas, professor at the Complutense University of Madrid.


Armor Plating of 75%


Iberdrola, headed by Ignacio Sanchez Galán, is much better protected than Endesa was in its day. To change the regulation governing armor plating, Endesa required the approval of owners of 50% of the capital on the corporate board. Iberdrola requires 75%. There are conditions under which the limitation on voting rights is automatically nullified — where they would not have to convoke the board to change the statutes — but those are just as much of a deterrent. “The major advantage that this offers is that managers are better protected, and that it costs a lot to change the statutes,” says Manuel Romera, director of the finance department of the Instituto de Empresa, a business school in Madrid.


According to Esteban Garcia-Canal, professor of corporate management at the University of Oviedo, “armor plating of 75% is not an insurmountable barrier. You only need a critical mass of larger shareholders.” Under these conditions, “once you take the step of presenting a takeover offer, it becomes difficult for new shareholders to create a systematic blockade of a new management team since there would then be an impasse that doesn’t benefit anyone.” Looking back, Garcia-Canal recalls that “history tells us that groups that would possibly support such a takeover wind up coming to an agreement with the major shareholders. That sort of clear, unconditional support of the managerial team by [ownership of] 25% of the capital would put a stop to the deal.”


According to Maroto, “armor plating of 75% is for the sort of case where the form of payment [for the company] is in shares (in whole or in part), and it [the armor plating] winds up being only 66%, provided the compensation is in cash. The advantage there is when a really huge company can pay about €80 billion (the current market value plus a “desired” premium). Only EDF could do that, but on the other hand, 85% [of EDF] is owned by the French government, whose merger policies are asymmetrical. On the one hand, [the French government] does not permit non-French companies to acquire French companies but on the other hand, it promotes takeovers [by French companies] of foreign companies.”


Optimists say that the advantage for anyone who bids for Iberdrola is that the company has not managed to establish a strong nucleus of shareholders who are ready to defend the company whichever way the wind blows. There is only a relatively stable nucleus of shareholders. Apart from the big investors, the ownership of Iberdrola comprises a dozen savings banks. Romera says that Iberdrola is a very diversified company that is well-managed and operates in a competitive market. In this sort of case, he says, “If a hostile takeover offer for Iberdrola succeeded despite the difficulties, it would be very beneficial for the company that took it over. In other cases, such as EDF, it would be impossible to launch a takeover because the French government is behind that company, and its regulations do not permit a foreign-owned company to come in.”


For Mascareñas, it is fundamental to make a distinction between “renewable [energy], the future needs of electrical energy, customers, and a future European energy market… They should produce sufficient synergies for potential buyers.”


Experts say that provisions governing armor plating, capital gains and the maximization of value will be key ingredients in the next chapter in the bidding for Iberdrola. Once the fruit has been cut open and tasted, it will be impossible to close it up until the companies involved in the case make all their moves, they note. EDF, Germany’s E.ON, and even France’s Suez energy group and Germany’s RWE are all thinking about taking a bite of Iberdrola] No matter which foreign company winds up offering a good price for Iberdrola, if there is no political opposition, then the key factor will be ACS, experts suggest.


That company, headed by Florentino Pérez, will be the master of ceremonies. ACS became one of Iberdrola’s shareholders at the end of 2006, and it has a 12% ownership in it, directly and indirectly. Although ACS is not on the corporate board, it is the largest shareholder in Iberdrola. ACS has never hidden its intention to bring together the strengths of Iberdrola with those of Union Fenosa, the third-largest Spanish electricity company, in which ACS controls 45% of the shares. Once the regulations are changed, ACS will attain 50% ownership in Union Fenosa. Any company that wants to launch a hostile takeover offer for Iberdrola will see ACS as the key to achieving its goal, observers suggest.


“What ACS wants is to achieve optimal size and profits. Something similar happened with Endesa, whose shares rose from 18 euros up to 40 [euros],” adds Romera. For Mascareñas, the companies that should vie for Iberdrola are “those that really can achieve synergies by acquiring all or part of Iberdrola. This doesn’t include any possible ‘political’ synergies that also count.” Maroto believes that the company that acquires Iberdrola will achieve “an outstanding position in renewable energy, a major market share (second place in Spain’s electricity market), and synergies outside the country through means of Iberdrola’s ownership of Scottish Power (U.K.) and Energy East (U.S.).” As always, he adds, “maximization of value will be the leitmotif of all the competitors. However, in practice the factors that determine the success or failure of the deal will be the added value that is obtained, the power structure created in the resulting companies and the acquiescence (or lack thereof) of the government.”


The Power of ACS


The key question is how ACS can make the most of this opportunity. It has already invested some €5 billion but it has not been able to maximize the profitability of that investment. Experts say that, without doubt, ACS will negotiate with EDF, E.ON or with any other bidders. It has already negotiated with EDF, and it certainly talked earlier with E.ON. From the financial point of view, EDF, which has a market capitalization of €126 billion and E.ON, with €85 billion, are most prepared for taking over Iberdrola. According to Maroto, ACS would be the “instigator, since it might benefit from the second phase of the takeover, in which it would divest itself of assets with Union Fenosa, increase its domestic market share, and achieve diversification unrelated to the construction business, where debt has become excessive and the market cycle has turned downward. (It is widely anticipated that EDF might be interested in Iberdrola’s foreign business and in that part of its domestic business that Spain’s National Energy Commission would permit it to acquire.)


Industry sources believe that ACS is not interested in remaining a partner in Iberdrola along with any hypothetical new owner, whoever that may be. Nor is ACS interested in merging Fenosa with Iberdrola. Adding those two companies together would create a new giant worth €63 billion in which ACS would control 20% (which would correspond with its 45% ownership in Fenosa and its 12% in Iberdrola.) ACS would not strengthen its market share through global expansion, unlike Fenosa, where foreign sales now contribute more than 50% of that company’s EBITDA.


Financially, what makes most sense for ACS would be to deliver its 12% of Iberdrola to one of the companies that is ready to bid for Iberdrola. In exchange, ACS would get a mix of assets in the electricity company, including hydroelectricity, nuclear energy and renewable energy. ACS could assume those assets from Fenosa, compensating for its current imbalance, which is very concentrated in thermal power.


Time seems to be working against the bidders. The rumors have reawakened the price of Iberdrola shares, which have once again moved above the 10-euro mark. That makes any deal more expensive. “If they merged with Fenosa, they would create a giant from which they could achieve great economies of scale, more competitiveness, and greater efficiency,” notes Romera.


Galán continues to cite political and business groups that oppose any hostile moves by companies that hope ultimately to carve up the company. Some Spanish politicians, such as the president of the regional government in La Rioja, have expressed concern that Iberdrola may be purchased by a state-owned French company such as EDF. “The fundamental thing is to consider the general [public] interest, and for Iberdrola to remain in the hands of Spanish owners,” he emphasizes. He adds that Spain “needs strong companies such as Iberdrola, who support a policy of growth and expansion into foreign markets.”


The important question, adds Romera, is “whether Galán winds up having Iberdrola carved up.” Using the strictest standards, says Maroto, “none of the potential buyers would be suitable; one of them because its decisions would be influenced by the French government; the other one because its expertise has nothing to do with the electricity sector (except as a shareholder). At least it is clear that if EDF could ‘facilitate’ a very high tension connection with France (something permanently demanded by Catalonia), ACS could become a new “national champion” in the energy sector by joining forces with Union Fenosa and, perhaps, with Gas Natural.”


Nevertheless, Maroto believes that it is very hard for ACS to “have a direct role, given its current financial structure, its excessive indebtedness and its need to redesign its business strategies and its approach to globalizing its core business.” At the moment, Galán “has managed things in such a way that vice-president Solbes has shown little proclivity to slice up the company, and has support from shareholders such as Bancaja and BBK, two Spanish financial institutions. We’ll have to wait and see if there is some form of political compensation — since approval by the French government can facilitate the very high tension connection with France — or some sort of economic compensation because liquidity is something highly valued by financial institutions,” adds Maroto.


Nevertheless, the European Court of Justice has condemned Spain for its failure to comply with the European Commission treaty that opens investment in the energy sector to companies owned by foreign governments. As a result, EDF, which has openly acknowledged its interest in Iberdrola and is more than 80% controlled by the French government, has one less obstacle along its road toward Spain.