Gap widens in E.ON’s bid for Endesa

The world, it seems, has of late been conspiring against Wulf Bernotat, chief executive of German energy company E.ON. As an expiry date for E.ON’s €41 billion-bid for Spanish utility Endesa looms closer, Bernotat seems further away than ever from his goal of closing what would be Europe’s largest cross-border energy deal.

Bernotat has been ambushed at every turn since launching E.ON’s original €29bn bid for Endesa in February last year. The bid, which rivalled Barcelona-based Gas Natural’s offer of €22bn, was raised to €36.5bn in September last year in response to a raid on the markets by Spanish construction company Acciona, which now holds a 22% stake in Endesa.

More of a worry than Acciona, perhaps, is Italian utility Enel. Frustrated by the French government last year in its attempts to gain a foothold in the French market by merging with Suez, when a hasty marriage was arranged between Suez and Gaz de France, Enel suddenly appeared on the scene with a 10% stake in Endesa. That stake was increased two weeks ago to 22% and raised again on Monday (12 March) to 24.98%, ridiculously close to the 25% threshold that would trigger an all-out bid.

Acciona and Enel are not the only hard-hitters holding up E.ON. The Spanish government is currently engaged in an acrimonious battle with the European Commission over conditions imposed on E.ON’s bid. Caveats included restrictions on asset sales and the demand that only Spanish coal be used in power stations. The Commission last week (7 March) announced court action in the event that Madrid declines to drop obstacles within seven working days. A response from Madrid is expected tomorrow (16 March).

"The swords have been drawn," says Javier Agrela, a technical analyst with the Madrid-based Banco Urquijo. E.ON is evidently in a weakened position. Last week (6 March), it dropped a major bid condition requiring that Endesa scrap rules capping voting rights at 10%. Speaking at a press conference last week, Bernotat appeared to scale down his ambitions, accepting that a minority stake, rather than a full-blown bid, might be a possibility. He also expressed his desire to hold talks with archrival Enel.

Despite the apparently insurmountable obstacles standing in Bernotat’s way, however, analysts believe negotiations are inevitable. The main priority of Acciona and Enel is not necessarily to gain control of Endesa, but most probably to ensure they do not end up walking away from Endesa empty-handed. "There is a strong rationale for both parties [Acciona and Enel] and the Spanish government for a sale," says Matthias Heck, an analyst at investment bank Sal. Oppenheim in Frankfurt. "As a compensation for tendering, Enel might get some direct operating assets. It’s an extremely smart move."

Heck’s view is backed by Agrela. "There have to be negotiations of some sort," he says. With the deadline of 29 March for E.ON’s bid looming closer, however, time is of the essence. Some, most notably investment firm Goldman Sachs, think that E.ON should now be buying itself a 25% stake in Enel on the international markets to offer as a swap for the latter’s Endesa stake. A report last week in Italian daily Il Sole 24 Ore (10 March) indicated that Enel may be planning to increase its leverage once Spain, as planned, raises the threshold for bids to 30%. Bernotat will have to act quickly and wisely, preferably before the end of the month, to close the widening gap between E.ON and Endesa.

The world, it seems, has of late been conspiring against Wulf Bernotat, chief executive of German energy company E.ON. As an expiry date for E.ON’s €41 billion-bid for Spanish utility Endesa looms closer, Bernotat seems further away than ever from his goal of closing what would be Europe’s largest cross-border energy deal.