On Monday, September 5, Gas Natural, the largest distributor of gas in Spain, took Spain’s electricity market onto an amazing new course. The gas company revolutionized Spain’s business map by launching a public takeover offer for Endesa, Spain’s leading supplier of electricity.
This is not the first time Gas Natural has tried to make a move in the market. Two years ago, the company tried to buy Iberdrola, Spain’s second-largest electricity company. However, the deal was aborted because the new company would have had too much debt, which would have made it hard to invest in new networks. Both its takeover offer for Iberdrola and its current offer for Endesa have this in common: Gas Natural is eager to complement its gas business by raising its position in Spain’s energy market. In both cases, the offers were hostile; the managers of neither Iberdrola nor Endesa agreed to the deals.
The Terms of the Move
Gas Natural, which is run by Salvador Gabarró, offered 21.3 euros for each share of Endesa, which is a premium of 11.5% above Endesa’s share price on the day of the offer. Overall, the acquisition would cost Gas Natural some 22.55 billion euros, double the value of its own company. If the offer goes through, Gas Natural would use its own shares to purchase 65.5% of the total acquisition price, after expanding its capital. It would use cash to pay for the rest.
Endesa’s board of directors has already announced that it is opposed to the deal. However, shareholders of the company will have the final word.
If Endesa shareholders accept the takeover offer, which involves buying 75% of their shares, Gas Natural will need the approval of both Spain’s national energy commission (CNE), which regulates the country’s energy markets, and the TDC, the agency which rules on anti-trust issues. The CNE looks into the financial solvency of companies created by takeovers to make sure they can comply with their customers’ energy demands. The TDC is responsible for determining the level of market concentration that would result from a takeover. It consults with the government, which is responsible for approving or not approving the deal within about five months.
The European Commission would not be able to intervene in the takeover, because it is not a cross-border deal; both countries are from Spain. Although the government of Spain could ask Brussels to evaluate the deal, that doesn’t seem likely to happen. Both companies have shown an unwillingness to have Brussels play a role in the takeover. Gas Natural wants Spanish regulators to decide whether or not to approve the deal. Meanwhile, Endesa says that it wants Brussels to study the merger. For that to happen, Endesa would have to find a ‘white knight,’ an international ally, for the deal to become a responsibility of the European Community. European officials responsible for competition policy have already said on several occasions that they oppose the excessive concentration that exists in certain sectors.
Another problem that Gas Natural would face is the amount of debt, which would rise to 27 billion euros. To finance the deal and avoid having it rejected because of excessive concentration, Gas Natural has agreed with Iberdrola to sell assets worth between 7 billion and 9 billion euros. This agreement would also have to be approved by the proper authorities. This would mean transferring such assets as gas distribution networks that serve 1.25 million customers in Spain as well as facilities for electricity production in Spain, France and Italy, and in Spain’s Balearic Islands. In addition, to prevent the CNE from vetoing the deal, Gas Natural would also have to produce a document declaring that it would invest 4.760 billion euros in its gas and electricity distribution business between 2006 and 2009, once the takeover wins approval.
Fewer Competitors in the Market
If the deal goes through, and the sale of Iberdrola’s assets is permitted, it would create a real revolution in Spain’s energy market and completely change the market share of the various players. The new company, derived from the merger of Gas Natural and Endesa, would become the giant, with a stock market value of 26 billion euros and revenues close to 24.5 billion euros. Iberdrola would be the second largest company in the sector, with revenues of 9.56 billion euros and a market capitalization of 20.22 billion euros. The third player in the market would be Unión Fenosa, with a market value of 7.8 billion euros and sales of 5.438 billion euros. Two other companies would be left further behind, Hidrocantábrico and Viesgo.
As a result, the remaining competitors would find it very hard to increase their market share because of their inability to confront this new giant, which investment bankers are projecting as the third-largest electricity provider in Europe behind only Enel of Italy and E.On of Germany. The new company would also be the largest electricity company in Latin America, with 30 million customers.
Nevertheless, a deal involving two companies of that size raises several questions: Would it mean an excessive concentration in Spain’s energy market? Would a merger of two big players help consumers? Or would the absence of other players wind up hurting consumers?
“No competitor is disappearing because no competitor existed. Gas Natural had a minimal presence in supplying light, just as Endesa had in gas supply,” Rafael Villaseca, managing director of Gas Natural, said at a press conference. However, the numbers show that 80% of the gas and electricity sector would remain within the hands of two companies – Gas Natural and Iberdrola. The gas company would retain 50% of the gas business and 30% of the electricity business. In contrast, Iberdrola would have 50% of the electricity business and 30% of the gas business. The rest of the players in this market – Unión Fenosa, Hidrocantábrico and Viesgo – would share the remaining 20% of both of those markets.
“The fact that 80% of energy is in the hands of two companies – Iberdrola and the new Gas Natural – means that both companies would centralize control of power in the energy market,” notes Manuel Romera, director of the financial center of the Instituto de Empresa [Business school] in Madrid.
Juan Antonio Maroto, professor at the Complutense University in Madrid, believes that “in principle, the operation would favor the stability of production, given the proliferation of combined cycle electricity plants run by natural gas.” Maroto sees a process of vertical concentration involving the two companies: a supplier of gas (Gas Natural) and an electricity company (Endesa). Their integration would enable the gas company to have access to fuel at lower rates for use in generating power. Vertical concentration lowers the costs of intermediation and lowers purchasing costs. Nevertheless, Maroto wonders: “Will they maintain the current cost structure, if you take into account the link between gas prices and crude oil prices? And if that doesn’t happen, wouldn’t it be more convenient to have diversified electrical energy production?”
The Implications for Consumers
The day after the takeover offer was announced, Spanish consumer groups reacted. The Organization of Consumers and Users in Catalonia (OCUC) said further concentration of the energy market would result, and that would not be a good thing. It would eliminate consumers’ freedom to choose the company that supplies their gas and electricity. The director of OCUC, Montserrat Torrent, explained that “if one company dominates the sector, it leaves consumers with few options for freely choosing their company.”
Along the same lines, the Organization of Consumers and Users (OCU) called the takeover offer “bad news for free competition and for the consumer because it means the disappearance of a provider from the market.” The group believes that “in practice, companies share the market, and now they are moving toward more of a situation where there are barely two providers. The result is that people will have to pay more for electricity.”
“When fewer companies offer gas and electricity, consumers are ultimately affected,” notes Romera. “Gas Natural will raise its raises, in part because the price of oil will also rise. In all of these takeovers, the same thing happens: The companies get everything, regardless of what consumers think. That’s because, even if you assume the dubious hypothesis that they might lower rates and improve the quality of service, only a few customers have transferred from one service provider to another as a result of the deregulation of the market. Only the big customers can take advantage [of deregulation], because they are the only ones who really have the ability to negotiate rates with the electricity companies,” notes Maroto.
Nevertheless, Jose Montilla, Spain’s minister of industry, tourism and trade, is certain that “the reduction in the number of operators in a sector, especially if it is regulated (as electricity and gas are in Spain), does not necessarily imply that prices will be allowed to rise, and competition will be reduced. In a regulated market, rates do not depend only on the existence of greater competition, but also on the prices of raw materials and on interest rates, among other factors.”
For its part, the Federation of Consumers in Action (Facua) announced that the merger of Endesa and Gas Natural could have positive consequences for consumers and for the marketplace. The group believes that the deal would create a provider with sufficient power to become more competitive in international markets, which could enable it to offer more attractive rates in Spain than are currently available.
Mauro Guillén, a professor of management at the Wharton School, does not believe that the takeover “would be harmful, because it involves a merger of two companies that do not compete in the same market; it is a merger of companies that are looking for synergies. I see no evidence that it is going to hurt consumers, especially in Latin America.” Romera agrees that the deal would not have much negative impact on customers in Latin America, “because there is not a lot of competition in this market.”
A Political Controversy
The takeover offer has created a political firestorm in Spain. The government led by the PSOE (The Spanish Socialist Workers Party) believes that the deal is motivated only by business considerations. However, the opposition PP (the party that belongs to the international bloc of Christian Democrats) sees the deal as an business maneuver by the executive branch that is trying to provide benefits to its political allies on the left – Esquerra Republicana de Cataluña, el Partido Socialista de Cataluña (the Catalonian Socialist Party) and Izquierda Unida, the United Left bloc. These are the three Catalonian political parties. Another fundamental theme involves the debate among Spain’s various autonomous regions. For quite some time, Pasqual Maragall, president of the government of Catalonia, has dreamed about creating a major, world-class energy company in that region. The merger of Gas Natural and Endesa would turn his dream into a reality. And it would come at a time when the PSC leader has serious problems moving ahead with his main legislative project known as the Estatut. This framework would regulate Catalonia’s degree of autonomy. For that reason, the PP views the takeover offer as an attempt by the Government of Spain to pacify its political allies. If the takeover goes forward, Maragall will have fulfilled at least one of his dreams.
The takeover has also sparked a confrontation between Spain’s two largest savings banks – La Caixa and Caja Madrid. Spain’s savings banks combine their financial functions with other kinds of social activities. Gas Natural is controlled by La Caixa (of Catalonia), which owns 35.5% of the company’s shares. Meanwhile, Caja Madrid owns 9% of Endesa’s shares, the largest bloc of ownership in that company. La Caixa also has a 2.03% stake in Endesa. Caja Madrid has publicly announced its opposition to the deal and it has frustrated La Caixa’s first attempts at reconciliation. Caja Madrid can play a decisive role in determining the success of the takeover in coming months.