European utilities. Bidding and competing

Will more consolidation of Europe's utilities sector follow E.ON 's bid for Endesa?

IT IS the biggest takeover bid in the history of the utilities industry--and it may be just the beginning. On February 21st Germany's biggest power group, E.ON, bid euro29.1 billion ($34.7 billion) to take over Endesa, a Spanish electricity giant. E.ON's move may signal the start of a long-awaited consolidation, in which four or five big players come to dominate the entire European energy utility market.

Since E.ON was created in 2000 through the merger of Veba and Viag, two German energy firms, the group has hoovered up companies big and small. It bought Britain's Powergen in 2002 and Ruhrgas, Germany's leading gas company, the year after that, as well as a host of smaller companies in northern and central Europe. After talks with Scottish Power broke down last November because the British energy group rejected E.ON' s takeover offer, Wulf Bernotat, boss of E.ON, started to plot his big coup: a takeover of Endesa, which would make E.ON the world's largest electricity and gas firm, with more than 50m customers in more than 30 countries. He approached Endesa for the first time on December 1st.

Mr Bernotat's all-cash offer for Endesa is bigger and better than an earlier euro21 billion cash-and-shares offer by Gas Natural, another Spanish utility. E.ON can afford such a splash. On the day of the bid's launch the firm reported a 71% jump in net profit from euro4.3 billion to euro7.4 billion. Yet Endesa's bosses reacted coolly to their German suitor: they think their company is worth more. The Spanish government is even less happy about a bid it sees as unwelcome. It had backed Gas Natural's offer, despite its rejection by Spanish antitrust authorities, in the hope of creating a national energy champion.

Mr Bernotat knows that he is stepping into a political hornets' nest, involving bitter political and regional rivalries within Spain. "We don't want to get involved in politics and we expect market rules to be applied," he says. The Spanish government could use its shares in Endesa to block the German bid. But it will probably refrain. Spain would lose many friends within Europe by acting that way, at a time when Spanish companies are launching big cross-border raids, such as the bid by Ferrovial, a Spanish construction company, to buy BAA, owner of Heathrow, Europe's busiest airport; or Telefonica's bid for O2, a British mobile-phone operator.

The European Union's competition watchdog is likely to approve the bid too, since there is hardly any geographical overlap between E.ON and Endesa. E.ON's bid does, however, pose a dilemma for Neelie Kroes, the competition commissioner, because it runs counter to her efforts to increase competition in European energy markets. On February 16th Ms Kroes warned energy companies they could face tough antitrust penalties for squeezing out competitors and keeping prices unreasonably high.

Ms Kroes is putting more pressure on the big companies because the EU's deadline of July 2007 for full liberalisation of European energy markets is approaching fast. Last year companies started to position themselves for a genuine single market through a series of takeover bids. Suez, a French water and power company, took over the 49.9% of Electrabel, a Belgian electricity company, it did not already own. And France's Electricite de France (EDF) and AEM, the power supplier for the city of Milan, took over Edison, the second-biggest Italian energy firm.

E.ON's bid for Endesa is putting more pressure on the group's rivals to grow. Like E.ON and RWE, the other big German energy group, EDF and Italy's Enel cannot grow at home without running into trouble with antitrust authorities. A day after E.ON's bid for Endesa was announced, Enel signalled that it wants to buy a stake in Electrabel, and may even launch a hostile bid for Suez itself.

If no rival to his own bid emerges, Mr Bernotat hopes the deal will be done by the summer. But Gas Natural is not giving up--it is talking of upping its bid. However, this is probably an empty threat. Gas Natural is half the size of Endesa and stretched its financial fire-power to the limit with last year's bid. Ultimately E.ON, EDF and Enel are likely to be among the handful of dominant utility companies in Europe. "We can see a second wave of consolidation of the industry coming," predicts Mr Bernotat.

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