How not to block a takeover

Apr 3rd 2007
From The Economist print edition

Spain's government is the big loser in the battle for Endesa

HAVING fought for more than a year against fierce resistance from Spain’s Socialist government, Wulf Bernotat, the boss of E.ON, Germany’s biggest energy firm, conceded this week that his plan to buy Endesa, Spain’s biggest electricity company, was irrevocably doomed. On Monday April 2nd he announced that he would drop his bid after reaching an agreement with rival bidders to buy some €10 billion ($13.4 billion) of Endesa’s assets if their own plan to acquire the firm succeeds.

Under the terms of the deal with Enel, an Italian electricity giant, and Acciona, a Spanish construction and services group, E.ON will get all of Endesa’s European assets outside Spain, and some of Enel’s operations in Spain. This would make E.ON the third-biggest electricity company in France and the number four in Spain and Italy. Since Enel, Acciona and Sepi, the state holding company, now own almost 50% of Endesa, E.ON was unlikely to win support from a majority of shareholders. And, Mr Bernotat admitted, his firm is not interested in a minority stake.

Mr Bernotat made a wise decision. Further legal and regulatory trench warfare between E.ON, Enel and Acciona and Caja Madrid, another big Endesa shareholder, would have meant more uncertainty for investors and distraction for E.ON’s management. “E.ON has turned what had developed into a very messy situation into a semi-victory furthering its own aims,” says Andrew Moulder at CreditSights, a credit-research company.

The outcome for Enel is good too, assuming the takeover of Endesa goes ahead. It will gain a much needed presence outside of its home market and reduce its dependence on the Italian regulator. Enel is paying a high price, but Endesa reported stellar results recently and European energy companies are desirable prey in the run-up to full deregulation of the European Union (EU) energy market this July.

Acciona did even better than Enel. The Spanish company, led by José Manuel Entrecanales, is likely to be rewarded with lucrative state construction contracts for its help in obstructing the Germans. It has the option to sell its Endesa stake to Enel between 2010 and 2017 at a minimum price of €41 per share, rising in line with interest rates. The Spanish conglomerate will also get access to Endesa’s renewable-energy operations, which will complement its own renewable business.

Spain’s government comes out the worst in this tortuous saga. It supported a lower bid for Endesa by Gas Natural, a smaller Spanish energy firm, because it wanted to create a national energy champion and keep Endesa in Spanish hands. But Gas Natural dropped its bid a couple of months ago, E.ON will now enter the Spanish market, and Endesa’s European arm will be broken up. Moreover, the EU is taking legal action against Spain for breaking European takeover rules.

Manuel Conthe, boss of the CNMV, Spain’s stockmarket regulator, quit his job on April 2nd in protest at the government’s pressure on CNMV to scupper E.ON’s bid for Endesa. His authority was consistently undermined by other members of the regulator’s board who are close to the government. Mr Conthe will explain the reasons for his departure to the Spanish parliament’s economic commission next week. The government can expect an uncomfortable return from the holiday weekend.