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October 2, 2001 


Spain's Endesa Moves In for a U.S. Acquisition 



By Will McNamara
Director, Electric Industry Analysis 


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[News report from Power Finance & Risk] Endesa, Spain's largest utility, is setting up a business development unit in New York and will shortly transfer three executives from its Madrid headquarters to seek out investment opportunities in the United States. Virginia Sanz de Madrid, a Spanish utility analyst at Deutsche Bank in Madrid, says Endesa is probably looking to acquire existing generation or distribution companies rather than develop new assets from scratch. She adds that Endesa is looking to spend some $2 to $3 billion to enter the U.S. energy market. 

Analysis: A common response to reports that Endesa is attempting to expand in the United States may be: Why has the company waited so long? Along with affording new opportunities for domestic companies, deregulation of the U.S. electric market has also enticed several large European power firms to expand their scales through a stateside acquisition. Thus, some financial analysts may wonder if Endesa is jumping on the U.S.-expansion bandwagon too late. The timing may still be right for Endesa, however, considering that falling wholesale electricity prices across the United States and the decreased value of generation assets over the last few months could actually make a U.S. generation purchase more lucrative today than in recent years. Consequently, Endesa's rumored expansion efforts in the United States, and continuing acquisitions across continental Europe, are part of the company's aggressive growth strategy. 

Under the monopoly system in Spain, Endesa was clearly the country's largest power firm, owning about 22,576 MW of generating capacity and controlling 67 percent of Spain's electricity market. However, due to its own move toward privatization, the Spanish government has placed restrictions on the domestic growth of the country's largest electric companies, requiring Endesa to look abroad for growth opportunities. Thus, for some time there has been little question that Endesa would like to develop interests across continental Europe, and is not going to let any dust settle before it continues to expand. The fact that Endesa also plans to expand in the United States represents a new, but not necessarily surprising, direction for the company. 

The impetus for Endesa moving into the United States, beyond the opportunities for growth that exist in this country, may be rooted in some setbacks that Endesa has experienced in Spain and minimal acquisition opportunities across continental Europe. In late 2000, Endesa made its first significant move outside of Spain when it purchased a 30-percent interest in the French electricity generator Societe Nationale d'Electricite et de Thermique (SNET). While a comparatively small company by American standards, SNET is the second-largest electricity company in France in terms of installed capacity, and third largest in terms of electricity generation. SNET owns five coal plants totaling 2,600 megawatts, which generate about 6,838 GWh annually. This is a very low output, and in fact SNET accounts for only 2.5 percent of the market share in France. However, given the fact that France's largest energy company, EDF, still has a hold on about 90 percent of the market in the country, the acquisition of the next-largest company was a major coup. The acquisition of SNET was also attractive to Endesa because of the company's experience in coal-based electricity-which still is the power source for roughly half of the electricity produced across the Continent-and its progressiveness in terms of technology. 

Upon the acquisition of SNET, Endesa began friendly merger proceedings with Iberdrola, the second-largest power firm in Spain. Under the now-terminated deal, Endesa would have purchased Iberdrola for about $12.6 billion and created a new entity well prepared to expand across Europe and Latin America. Reportedly, the merger would have created the world's third-biggest electricity company, after Tokyo Electric Power and Enron, and without question would have marked Spain's largest industrial merger to date. For further perspective, the new company created by the merger between Endesa and Iberdrola would have had a combined market capitalization of approximately 36 billion euros (or $32 billion in U.S. terms). This would have surpassed Duke Energy's market capitalization of $30.3 billion and been roughly the size of American Electric Power, TXU, and Reliant put together (resulting in a $33.8 million market capitalization). Had it materialized, the merger also would have given a considerable jolt to Spain's fast-growing power market, and altered the current playing field among Europe's largest power companies. 

However, in a major setback for Endesa's growth, Spanish authorities required that the merged company sell off some generating capacity, arguing that Spain needed new players to increase competition. The government also ruled that the new entity would have to lower its market share of distribution, and authorities cut the amount of stranded costs that the new company would be able to recoup. Although analysts had expected the merger to proceed despite the government conditions, Endesa and Iberdrola said the imposed governmental conditions outweighed the benefits of the merger, which would create fewer synergies than initially proposed. Ironically, much of the funding for Endesa's purchases have come from the sales of its own non-strategic assets that took place in preparation for the Iberdrola acquisition. 

Moreover, the inability to grow its scale through the purchase of Iberdrola has apparently prompted Endesa to concentrate on finding new acquisition opportunities. In addition to expansion into the United States, last month Endesa led a consortium that will acquire the generation assets of Enel, Italy's largest generating company, for 2.63 billion euros. The generating assets, which are housed under a subsidiary company known as Elettrogen, include an installed capacity of 5,700 MW that is ranked as the second-largest generating firm in Italy. Elettrogen is one of three companies in which Enel grouped its generation assets in order to comply with Italian regulatory mandates regarding divestiture. The purchase of Elettrogen marks the first significant expansion of Endesa beyond its home territory in Spain. In the purchase agreement, Endesa will have 45-percent ownership of Elettrogen, partnering with Banco Santander Central Hispano (40 percent), a Spanish bank, and Italian ASM Brescia (15 percent), a municipal utility that serves 400,000 customers in Italy. 

The acquisition of Elettrogen is an important component of Endesa's expansion strategy across Europe and may be an indication of how the company intends to progress in the United States. Endesa has established a goal of accumulating 8,000 MW of generating capacity beyond its existing assets in Spain by 2005. Through the purchase of Elettrogen and the previous purchase of SNET, Endesa has already reached that goal four years ahead of schedule. 

If Endesa does make a purchase of a U.S. company, it will most likely be an acquisition that involves substantial generating assets, as power generation has become Endesa's primary focus. To date, there have been a handful of instances in which an international power firm has bought a U.S. energy company since deregulation began four years ago. ScottishPower purchased PacifiCorp, National Grid purchased New England Electric System (NEES) and Eastern Utilities Associates (EUA), and Powergen bought LG&E. Note that all of these buying companies are based in the United Kingdom. Pending international deals include National Grid's purchase of Niagara Mohawk and the German company RWE's purchase of American Water Works, and EDF has made it clear that it also wants to expand in the United States. Generally speaking, international power firms have used the purchase of either vertically integrated utilities or unbundled businesses as a "testing ground" to learn the ins and outs of the U.S. energy market and plan subsequent specialization in a particular market niche. Further, although international companies such as National Grid are focused on the transmission side of the U.S. energy industry, the generation sector clearly offers solid opportunities for growth. In the spring of 2001, President Bush released an energy plan that calls for significant new energy production efforts, which opened up new windows of opportunity for international companies to further expand in the United States. 


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