Overseas Utilities Look to the U.S.

Top European power companies such as National Grid are expanding across the Atlantic, attracted by good earnings and regulatory stability

by Mark Scott

Residents of New York, Maine, and Houston have something in common they may not realize: When they pay their electric bills each month, the money ends up in the coffers of some of Europe's largest utilities.

From Britain to Germany to Portugal, big producers and distributors of gas and electricity are looking for growth by expanding out of their home markets. One of the juiciest opportunities lies across the Atlantic, in the huge and fragmented U.S. utilities market, where there are still about 60 separate operators ranging in size from rural collectives to giants like Pacific Gas & Electric (PCG).

The move stateside makes sense for the Europeans. Utilities such as France's Électricité de France (EDF.PA) and Germany's RWE (RWEG.DE) already have scooped up smaller local competitors over the last 10 years, leaving the continent dominated by handful of companies. Often shielded from foreign rivals by local governments, the companies now have few options left in Western Europe to invest their expanding capital reserves and satisfy shareholders pushing for profit growth.

U.S. Has Most Opportunities

The U.S. also offers some unique advantages. Analysts say the market is still crying out for consolidation, despite a decade of mergers that already has halved the number of utility players. Plus, the U.S. remains more open to foreign ownership than some other growth markets, such as Russia and China, and has a track record of regulatory stability that companies value in making long-term investment decisions.

"The U.S. is the most opportune place for European players to expand," says John McConomy, a partner in the U.S. Power and Transaction practice of PricewaterhouseCoopers (PwC). "They're cash rich, already consolidated in Europe, and have a good track record at generating revenues, particularly from renewables."

The European push into the U.S. may face a few snags along the way. Any would-be acquirer must get approval from federal, state, and local regulators, a complicated task that already has delayed a $4.5 billion takeover by Spain's Iberdrola (BusinessWeek.com, 06/06/07) (IDRO.BE) of electricity and gas provider Energy East (EAS), based in New Gloucester, Maine. Although the U.S. market is stable and safe, it's also relatively slow-growing, with annual revenue increases often as low as 1%. And with utility earnings typically capped by regulators, the business could become less attractive if lawmakers force utilities to ramp up their investment in costly renewable technologies.

Value of M&A Transactions

So far, these potential drawbacks aren't slowing the mergers and acquisitions wave. According to PwC, the number of U.S. electricity and gas deals rose 15% last year, to 146, and the value of M&A transactions soared 61%, to $87.5 billion despite the second-half credit crunch.