EDF, Europe’s biggest utility by market value, last week confirmed it had made contact with Spanish construction firm ACS over a possible bid for Iberdrola, Spain’s biggest utility. A deal would give EDF access to the only one of its neighbors where it does not yet have a presence. According to press reports, Germany’s E.ON is considering a counterbid, but it has declined to comment. “The problem is that as long as France is playing monopoly at home, it’s difficult for them to play monopoly abroad,” said Claude Turmes, a member of the European Parliament, representing the Green party. He opposed the move, which he said would add to the tendency for a handful of big players to dominate. “Mergers between these big companies are really a disaster,” he said, adding that if an EDF/Iberdrola deal took place, it must be subject to EU anti-trust scrutiny.

Iberdrola has a market value of around €50 billion ($72.78 billion), compared with EDF’s of roughly €125 billion. Spain is still smarting from a two-year takeover saga that culminated last year in Endesa being bought by Italy’s Enel and Spain’s Acciona, which agreed to sell some of Endesa’s assets to losing bidder E.ON. “They (Spain) have already lost Endesa. If they are obliged to give away Iberdrola, that would be tough to swallow,” said Koen Dierckx, analyst with KBC Securities. E.ON was also bruised by the Endesa battle. Its executives vented their frustration and analysts said the German firm would not want to risk such treatment again, making an E.ON counterbid unlikely.

Government backing
An EDF bid would require the backing of two governments -the French government because the state owns more than 80% of EDF and the Spanish because it has a history of protecting its power market from foreign invaders, including EDF, when it bid for utility Hidrocantabrico in 2000. Political approval from Spain would be particularly delicate, if not impossible, before March 9 general elections.  “It’s a tall order,” said one analyst who asked not to be named, although he said a friendly rather than a hostile bid just might be countenanced.

So far the Spanish government has been mostly non-committal in its reaction to EDF’s moves, while Economy Minister Pedro Solbes has said Iberdrola should not be broken up. A source close to Iberdrola said the company, and in particular its ambitious Chairman Ignacio Sanchez Galan, would fight tooth and nail to keep control, and could attempt to mire the takeover process in the courts as happened with Endesa. “The other thing to remember is that Iberdrola has highly restrictive statutes, which mean that any bidder would have to get at least two-thirds of the votes if it wanted to change the rule which restricts any one shareholder to 10% voting rights,” the source said. Speculation of some kind of a bid for Iberdrola has been rife since ACS bought a stake last year. ACS holds nearly 13% of Iberdrola through direct and indirect stakes and owns 45% of Union Fenosa. The theory is EDF and ACS would break up Iberdrola between them, merging part of it with Union Fenosa.

EDF has long wanted to get into Spain’s booming, potentially lucrative power market.  “It’s (Spain’s) deregulated …. but it’s less competitive than the UK. The margins are good,” said Colette Lewiner of consultancy Capgemini. But a deal would be difficult, she said. “There are a lot of obstacles.” Buying into Iberdrola could also strengthen EDF’s links with Britain, where EDF wants to build nuclear power plants, although it would probably have to sell some assets. Iberdrola moved to defend itself from possible takeover when it bought Britain’s ScottishPower. “From a competition point of view, it would probably require some disposals in the UK,” said an industry source, who asked not to be named.  “A combination of EDF and ScottishPower in the UK would tie up a large amount of generation and … would give them 24.5% of the domestic electricity supply market, making them a clear number one.” It would also take the combined company perilously close to commanding the 25% share that alarms Britain’s competition authorities. (Reuters)