A little fish, a Spanish energy multinational known as Gas Natural, has tried to eat a big fish – Spain’s electric utility, Endesa. Halfway through the battle, a shark has appeared on the scene, ready to settle the battle – the German electricity firm known as E.ON.  While energy markets in Spain and Germany consider where to position themselves, another battle is taking place in the European Community, with Italy’s Enel trying to take over France’s Suez.


E.ON’s strategic move, which involved breaking up Gas Natural’s public takeover offer for Endesa halfway through the deal, was the catalyst that European electricity companies were waiting for to get started moving the pieces of the puzzle, so they would no longer remain behind when the new energy map for Europe is drawn up. According to Mauro Guillén, a Wharton professor of management, “Given the deregulation of the sector in Europe in 2007, the reality is that every company of a certain scale is going to be affected. It is hard to predict what mergers and acquisitions this will lead to. But, generally speaking, those companies that are weaker and poorly managed will be the target of takeovers.” The stock market is a clear indicator of the kinds of moves that could take place. Although the shares of companies that do the buying will also rise, the shares of companies that are likely takeover targets have been enjoying the biggest price increases, as in the case of Endesa, France’s Suez and Finland’s Fortum.


E.ON’s possible acquisition of Endesa has attracted the most attention in the global press because the resulting company would be the largest electricity provider in the world, far ahead of its closest competitor, France’s giant EDF. Other, similar deals have taken place in Europe. Italy’s Enel has become one of the most belligerent electricity companies when it comes to the European restructuring that all the experts are forecasting. Enel even tried to buy France’s Suez. The French government rejected that move, opting for an interventionist strategy that will be investigated by the European Community’s competition commission.


Furthermore, in an effort to avoid other acquisition attempts by companies from outside France, the French government has approved the merger between Suez and Gaz de France, a company in which the government is itself the main shareholder. The government will also be the largest shareholder in the newly created company. That way, the two most important players in the country’s energy sector – and in the entire world – will be in the hands of the government, which will be able to exercise a veto right in case another company tries to make an acquisition offer.


Meanwhile, Enel is ready to purchase any assets that Endesa must sell off after a takeover, whether those assets belong to Gas Natural or to E.ON. In much the same way, Enel is especially interested in acquiring Electrabel, the largest operator in Belgium, which currently belongs to Suez. Experts insist that in all of Europe, with the exception of Russia, there is room for only three or four strong energy conglomerates in the medium-term. The experts say that EDF, E.ON and Enel are Europe’s three strongest bastions. The fourth candidate could be Germany’s RWE, but only if that company manages to strengthen itself in Eastern Europe.


France’s EDF, which has been the leader in the sector until now, is not going to let E.ON steal away its top spot without putting up a fight. In fact, EDF has already announced that it is preparing a major move, depending on how events transpire in both Spain and Italy. EDF has a presence in the United Kingdom through its subsidiary EDF Energy. In Germany, EDF controls EnBW, and in Italy it owns Edison. For this reason, even if the takeover of Endesa is a success, some smaller Spanish electricity companies, such as Iberdrola, could become the target of big companies such as EDF.


Interventionist Governments


The problem has its roots in the positions that the various governments are taking about [trans-European] mergers. The United Kingdom is the most liberal and least interventionist government, while France has taken the opposite position. When EDF bought Italy’s Edison in May 2005, it looked like a good move. However, when Italy’s Eneal decided to take control of France’s Suez, it screamed bloody murder so they could create a favorable atmosphere for a merger with Gaz de France. Meanwhile, the Italian government has asked Neelie Kroes, head of the European Commissioner for Competition, to investigate France’s role in the move, which everyone considers interventionist.


Juan Mascareñas, a professor at the Complutense University in Madrid, says, “Clearly, the governments of market economies should never get involved in the marketplace. They should lay down the rules of the game in markets. Once those rules are established, the role of government should changes; it should monitor how the rules are being fulfilled but nothing more than that. If the government changes the rules for its own convenience, whether to help or to harm a competitor, it creates legal insecurity. In turn, that will lead to a review of the nation’s “country risk,” resulting in a lower rating and everything that involves. Normally, markets are more knowledgeable [than governments are] and they do a better job of distributing economic and financial resources than governments do.”


Guillén goes further. “If there are no problems about restricted competition, governments should not interfere. But the cases involving Endesa and electricity are different. Endesa has nuclear power plants. It supplies the Canary Islands, and it owns shares in the Algeria gas pipeline. That means it is a special situation.” Nevertheless, Guillén does not mean that the Spanish government must prevent the takeover by E.ON. He says that move “would provoke anger in the [European] Community.” In his view, the perfect solution would be if “Gas Natural improved on E.ON’s takeover offer. That way, the whole world would be happy: The government, shareholders, and the European Union. Let the marketplace operate.”


Manuel Romera, technical director of the financial department at the Instituto de Empresa in Madrid, explains his view: “Do we want to have competitiveness or not? We have made the effort, not merely with economic resources, to enter the European Union, and now we go around telling everyone that it is not worth anything.” It is not possible that someone “would want to be European in order to make acquisitions but not in order to be acquired.” According to Romera, Spain’s energy sector should be more competitive, and this is not going to be accomplished through an interventionist policy. “Everyone imposes obstacles,” he says, referring to Spain, France and Italy.


Nevertheless, he observes that the United Kingdom, which is, oddly enough, one of those countries that have not adopted the euro currency, respects the rules of the game more than any other country. And, perhaps because of that fact, the U.K. is one of the European economies that is functioning most effectively. The Anglo-Saxon model is more open to these kinds of [trans-European merger] deals. For example, he explains, “English society has been the big winner” in Santander’s acquisition of Abbey [bank of the U.K.]. “The Spanish company [Santander] has brought its business model to the U.K. Now, people [in the U.K.] can directly debit their accounts when paying their bills and they have access to cheaper mortgages.


Initially, Pedro Solbes, Spain’s minister of economics, guaranteed everyone that “no passports would exist” between European companies. Nevertheless, José Montilla, Spain’s minister of industry, was not thinking along the same lines. Montilla decided that something had to be done to prevent E.ON from taking over Endesa, even if its offer was better than Gas Natural’s offer for that company. While the German company [E.ON] offered 27.5 euros in cash per share [for Endesa], the Spanish company [Gas Natural] offered only 7.34 euros and 0.569 shares of Gas Natural; in other words, a total value of 21.3 euros per share. The response of Spain’s executive branch has been to change its laws to grant more power to the country’s National Energy Commission (CNE) so that it can intervene, and even prevent E.ON’s takeover [of Endesa]. As expected, no one in Europe has been happy about this, and it has provoked another controversy. In the opinion of Manuel Romera, “The Royal Decree is crazy” because it goes against fundamental principles of the E.U.


In its defense, Spain has used the protectionism of its neighbor (France). Spain has also mentioned the strategic nature of any country’s energy sector, and the so-called ‘golden share’ that the German government maintains in E.ON. As expected, Georg Wilhelm Adamowitsch, Germany’s secretary of state for energy, explained the government’s position on electricity. “E.ON is a company that is totally independent on the stock market, and the German government has no influence on it.” Everything is a misunderstanding,” he added. “E.ON is a publicly traded company that is not controlled by politics.” Wilhelm assured the public that there is no “golden share.” However, he acknowledged that there is a temporary limitation, until 2012. Over that period, E.ON is committed to maintaining the distribution of gas in Germany in the interest of pursuing the “common good”


Who is E.ON?


This notion of a “golden share” goes back to the creation of E.ON, six years ago, from the merger of two hundred-year old German companies, VEBA and VIAG. In 2002, they strengthened their strategic value by purchasing Ruhrgas, a gas company, following a fierce legal battle. At the time, the German government authorized the merger, although with some requirements. In addition to requiring E.ON to sell some shares in other companies, especially in the water sector, they imposed other conditions on the giant from Dusseldorf. The most important condition was this: If another owner became involved in E.ON, and it led to a redistribution of gas in Germany, E.ON would have to get rid of Ruhrgas.


This clause is still valid until 2012. Nevertheless, the company itself, in a pamphlet distributed to investors in the United States in 2004, noted that the Ministry of Economics “has the right to take some initiatives (including the imposition of a possible veto) in the event that E.ON decides to sell Ruhrgas or in the event that there is a change in the management of Ruhrgas; of if there is a change in the control of E.ON.” Adamowitsch has made it clear that “the formula they created will be considered only in the event that E.ON can be acquired by a company that would want to hand over or sell its gas assets, one-quarter or one-fifth at a time. This would endanger Germany’s access to gas pipelines and, as a result, its access to gas supplies. Only in such a case would we make use of this clause.”


Currently, E.ON is ranked second in the world in terms of production, behind only EDF. However, it is the leader when it comes to revenues. It has a staff of 79,000 employees and more than 30 million customers in twenty European countries as well as the United States. Its eventual integration with Endesa would give it 20 million additional customers, and raise the number of its employees to 107,000. Its main sources of supply are Russia, Norway and the Netherlands. In addition, it has a strong presence in Scandinavia, the United Kingdom and the United States. Its special strength derives from a very aggressive expansion policy in Central and Eastern Europe, where it controls 30 percent of the market.


Last year, E.ON achieved net earnings of €7.4 billion. Unlike its competitors, E.ON has no debt, so its competitors envy its financial situation. Beyond that, E.ON would be a major force to reckon in a takeover battle. If it were to succeed in its merger with Endesa, it would definitely become the largest energy company in the world. In Europe, the resulting company would be producing 327 terawatts (Twh) per hour (or one billion kilowatts per hour); would sell a total of 515 Twh of electricity and 931 Twh of gas. The new company would also have a total of 41 million customers. In America, its electric production would rise to 94 Twh. It would be selling 93 Twh, and it would have a total of 13 million customers. The company would be producing 140,000 Twh, followed only by EDF, with production of 130,000 Twh. Third spot in the world rankings would be held by Japan’s Tokyo Electric, with 90,000 Twh. The fourth position would be held by Exelon/PSEG of the U.S. (at 70,000 Twh); fifth would be Germany’s RWE (at 65,000 Twh); sixth would be Italy’s Enel (at 55,000 Twh); and the seventh spot would be held by France’s Suez (at 50,000 Twh). That company rise from ninth in the listing as a result of the merger with Gaz de France.


Gas Natural and E.ON?


Given the financial firepower of E.ON, Gas Natural has only two options. It can play the political card – the Spanish government can take on the European Commission and the Germany government with full force – or Gas Natural can raise the price of its takeover offer. The latter option seems likely. The problem, however, is that the financial condition of the German company is a lot healthier than that of the Spanish company. Gas Natural runs the risk of starting a price war in which Gas Natural has a lot to lose. This is the usual problem when a small fish tries to eat a big fish, experts say. The market believes that the best option for Endesa is E.ON, but Mauro Guillén does not share that view. Guillén says, “Endesa has not had a lot of luck in its international expansion, and it could be more profitable than it is. For that reason, it is being targeted by other companies. E.ON is a good company but it is not a world leader. Gas Natural, despite its smaller size, has an important presence in the world.” As a result, “it would an acquisition by Gas Natural would be a more positive move. It remains to be seen if they can raise their offer and go higher than E.ON’”


Manuel Romera says it is not easy to figure out which offer is best. The question is who is the offer for? When it comes to economic forces and markets, Romera believes “the E.ON proposal is perhaps the best” because “it respects the rules.” In Spain, the result would be one additional competitor [in the marketplace], instead of one fewer competitor. Customers would benefit from that kind of situation. “It is a complex deal” and everyone has forgotten that “shareholders are the kings; they are the ones who decide ultimately if they will accept the offer or will not accept it.” Perhaps that is the reason that no one can launch an offer for Gas Natural. Between them La Caixa and Repsol YPF jointly own more than 50 percent of that company [Gas Natural], and it is a hard company to sell.