Highly-charged row over power firms

Date: 31/05/01

By Bruce Barnard

THE FURORE over Electricité de France's acquisition of a 20% stake in Montedison, the Italian industrial holding company controlling the Edison utility group, is unlikely to slow the pace of cross-border mergers and acquisitions in Europe's fragmented electricity market.

Rows over state-owned EdF's expansion into neighbouring countries were inevitable after EU leaders failed to back plans to accelerate energy deregulation at the Stockholm summit.

Industry is not overly concerned, however, because it is fairly confident that the Paris-Berlin alliance vetoing the European Commission's call for full liberalisation by 2005 will unravel shortly after France's presidential and parliamentary elections in May 2002.

In April, Germany's E.ON underscored the hunger for cross-border deals by paying €15.3 billion in cash and assumption of debt for Britain's Powergen, 10 months after its was created by the merger of Veba and Viag.

A key attraction of the deal, which makes E.ON the world's second largest electricity company after EdF, is LG&E, Powergen's Kentucky utility, which will serve as a springboard into the giant US market.

The biggest consolidation in the EU energy market was driven largely by the slow pace of liberalisation. A year ago, E.ON chief executive Ulrich Hartmann said expansion in neighbouring countries would yield the biggest synergies, particularly in transmission and generation. But political obstacles ruled out bids in France, Italy and Spain -

RWE, E.ON's domestic rival, withdrew a €2.7-billion bid for Spain's Hidroélectrica del Cantábrico days before the Powergen deal emerged.

Other utilities are keen on business outside Europe. National Grid, Britain's nationwide transmission group, expects to generate around 60% of its profits from the US by the end of the year.

The balance has now tipped towards an open and competitive EU-wide energy market. E.ON has joined a list of foreign firms, including RWE, TXU of the US and EdF, owning British electricity, water and gas utilities, while Sweden and Finland have a tradition of open markets and investment in foreign utilities.

National regulators are busy fostering the establishment of a pan-EU energy market. ENEL, Italy's state-owned electricity monopoly, has just unveiled plans to spend up to h20 billion on foreign acquisitions in the next few years as anti-trust officials in Rome have ordered it to sell a third of its domestic generating capacity.

ENEL is mainly interested in the water industry, making a non-binding offer in mid-April for Scottish Power's Southern Water unit. But it is also keen on power trading in Germany and power generation in Spain.

The American giants are also eyeing openings in continental Europe. Others are making their first big moves, like Duke Energy - one of the biggest US power generators and energy traders - which plans to spend some €1.1 billion on European power generation this year.

The quickening pace of cross-border mergers and acquisitions, plus the EdF/Montedison row, will spur the Commission to dust off its proposals so it can present them to the first EU summit after the French elections.

The furore over Electricité de France's acquisition of a 20% stake in Montedison, the Italian industrial holding company controlling the Edison utility group, is unlikely to slow the pace of cross-border mergers and acquisitions in Europe's fragmented electricity market.