More Consolidation in Europe's Energy Sector

Posted by: Mark Scott on July 31

Europe’s economy may be in the doldrums, yet multi-billion takeovers are still sneaking through. The latest was announced on July 30 after Gas Natural — Spain’s second-largest electricity company — took the first steps to buy rival Unión Fenosa for $26.5 billion. If regulators green-light the deal, it would create a Spanish national energy giant to rival French behemoth EDF and represents the latest round of consolidation in Europe’s energy sector.

The July 30 agreement has been a long time coming for Gas Natural. The Barcelona-based utility twice has tried to create a national energy champion, first failing to acquire Iberdrola — the country’s current largest electricity company with a large renewables presence in the U.S. — in 2003 and again losing out to buy Spanish energy firm Endesa in 2007.

Under the latest agreement, Gas Natural will buy a 45% stake in Unión Fenosa from Spanish construction firm ACS for $28.63 per share — a 55% premium on the stock price before the takeover was announced. That will initiate a formal bid for Unión Fenosa under Spain’s takeover laws, as well as provide much needed cash for ACS, which has been hit hard by the implosion in the Spanish real estate market.

The question now is whether the $26.5 billion takeover will be good for European consumers.

By joining forces with Unión Fenosa, Gas Natural will create a national energy giant long championed by the Spanish government. Both France and Germany have supported similar moves by their domestic utilities, ensuring firms like GDF-Suez and E.ON have maintained their dominant local positions. That's allowed them to expand overseas, often gobbling up smaller firms across Europe while governments have blocked attempts by other utilities to enter the French, German, and Spanish markets.

This goes against the European Union's goal to liberalize the continent's energy markets to offer consumers more choice and -- so the theory goes -- bring down gas and electricity costs. After a number of utilities recently raised bills on the back of soaring oil prices, some might argue that less consolidation -- not more -- might be what consumers need.

In the energy companies' defense, wholesale gas and other fuel (ie: coal) prices have been skyrocketing, leaving utilities little choice but to pass costs on to customers. Further integration also could lead to greater cost savings, which might pay off for consumers in the long run.

Yet by creating a Spanish national gas and electricity giant, the $26.5 billion Gas Natural deal may not give European consumers more choice in where they get their energy. No one's saying the takeover shouldn't go through, just that other (foreign) firms also should have equal access to Spain and its lucrative utility sector.