E.on Bids Big for Endesa

With the EU pressing for deregulated power markets and utilities flush with cash, the $66 billion offer is likely a taste of things to come

German energy giant e.on (EON ) inadvertently provided an illustration of the complexity of cross-border deals in Europe when it held a press conference in Madrid on Feb. 21. E.on CEO Wolf H. Bernotat was announcing the company's $66 billion deal for Spanish energy supplier Endesa (ELE ). Bernotat, a German, had to keep putting on headphones to hear translations of questions posed in Spanish by local journalists, which he answered in English.

Such inconveniences are hardly likely to impede further pan-European megamergers. "I suspect there are more [deals] to come," Bernotat told reporters. He was expressing a widely held view. Power suppliers are trying to forge Europewide networks as the European Union pressures member countries to more fully deregulate their energy markets.

FLUSH WITH CASH. Companies also believe they have to be big to deal with huge producers such as Russia's Gazprom, industry sources say. And utilities in slow-growth countries such as Germany are trying to get a piece of faster-growing markets such as Spain or Latin America, where Endesa is strong.

The other big reason for utilities to make acquisitions is that they can. E.on, like other suppliers, is flush with cash as it profits from high fuel prices as well the sale of assets, such as apartment blocks, that don't have anything to do with the energy business. E.on net profit for 2005 rose 71%, to $8.8 billion, on sales of $67 billion, the company reported Feb. 21. That is allowing e.on to make an all-cash offer of $32.70 per share for Endesa.

"They're taking this step because they have the financial opportunity," says Nils Machemehl, who follows energy for private bank M.M. Warburg in Hamburg and thinks the deal will be good for e.on shareholders. Endesa issued a statement on Feb. 21, praising e.on's proposal for maintaining "Endesa's business plan without selling any assets." The company said, however, that the bid "does not adequately reflect Endesa's real value."

THE HEAT IS ON. The e.on bid reflects the growing pressure on European companies. They either have to do something convincing with their cash, or face shareholder revolts led by hedge funds. German blue-chip outfits saw profit increases of 10% to 40% in 2005, according to Dresdner Bank, following even bigger profit gains in 2004. That has prompted foreign investors to become increasingly aggressive.

In 2005, a group of hedge funds and mutual funds forced Deutsche Börse, operator of the Frankfurt Stock Exchange, to replace its CEO and return cash to shareholders. "Are the hedge funds looking at larger companies? Absolutely," a senior manager of a blue-chip German company said recently, adding, "They hunt in packs."

E.on, with a stock market value of $77 billion, can't easily be bullied. But even big companies feel the heat. "There is pressure," concedes an executive at another major European utility. That is one reason E.on returned cash to shareholders even as it bid for Endesa. For 2005, the company will pay a dividend of 7 euros per share, including a special dividend of 4.25 euros.

EYES ON EdF. The strategy seems to be working: E.on shares rose 2% after the takeover offer, to 95.55 euros. The Endesa deal "makes sense from a business perspective," says Neil Beddall, an analyst at Barclays Capital in London. "It gives them a leading position in a key market. It also takes off pressure from shareholders."

So expect more moves as companies try to avoid becoming power lunch. Germany's RWE, for example, is expected to make acquisitions in fast-growing Central Europe after it raises cash from the sale of its Thames Water unit in Britain, analysts say. Spain's Gas Natural, whose earlier bid for Endesa has been trumped by e.on, is expected to turn its attention to Union Fenosa in Spain or Iberdrola (IBDRF ).

Britain's utility companies are also expected to merge, while everyone wonders whether the French government will loosen its control over EdF to allow the giant energy supplier to take part in the deal making. Expect more polyglot press conferences.

READER COMMENTS

Ewing is BusinessWeek's European Regional Editor, based in Frankfurt
with Stanley Reed in London

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