Acquisition panic
As we've noted before, mergers and acquisitions tend to come in waves. Some of this is related to external conditions, including the perceived value of the operations in a market segment or the loosening of antitrust rules. But a lot of it is based on panic.
Once a sector starts consolidating, other players feel the need to follow suit in order to maintain market power and to deny growth to others. After a few acquisitions, panic often sets in, and a domino effect gets into play. Now, most large companies are always exploring the chance to buy out other firms in their industry, but the segment-wide panic moves the dealmaking from back to front burner. M&As are contagious.
For the potential acquirees, that panic time, with suitors bidding high, must look like the best tie to cash in, since the buying frenzy sends prices up. And certainly the late buyers are paying more than they might have if they acted earlier.
That's the scenario that's playing out currently in the energy utility business, where in the last few months there has been an unprecedented series of major deals announced, both internationally and internationally. This has been accompanied by bold (and often hostile) bids and counter-bids.
The biggest panic is happening in Europe, where the energy industry is reconsolidating. In the 1990s, pushed by the EU, most European companies spun off and broke up national utilities or at least made it easier form smaller companies to compete. AT that time, there were next to no cross-border gas or electrical utilities.
Now the case is altered, and the pieces are reassembling, and a concentrated oligopoly is forming. The big companies are flush with cash, thanks to high energy prices. And they need bulk in order to deal with massive suppliers like Russia's Gazprom, according to a BusinessWeek article ("E.on Bids Big for Endesa", 2/21/06). But the new companies are increasingly transnational, leading to a panic in countries that see the local utilities as one of the last areas where national interests can moderate private industry.
Just a few weeks ago, Spanish company Gas Natural made a $26 billion hostile bid for Spanish utility company Endesa, a move that would combine the #1 electric and gas companies in Spain.
Then, in reaction, German utility giant E.On soon made a $35 billion offer for Endesa. The E.On move, if successful, would make the world's largest utility company. The reaction from Spain has been to pass laws making such a takeover harder, but Spain faces the wrath of the EU for such protectionism. Meanwhile Endesa has declared that it considers even the E.On bid too low. The situation has not been resolved.
Then Italy's' Enel SpA (the #1 electrical supplier in Italy) last week announced it was considering making a hostile bid for French utility Suez SA, which owns electricity, gas, water, and waste assets. Suez is a private company ($55 billion in gross income) centered in France, but has operations in 130 companies. The word was that Enel would make a joint bid with French water utility Veolia Environnement, and divide of the water and waste assets to that company.
Almost immediately, the French government announced that Suez and gas utility Gaz de France would merge.
A $24 billion company, GDF is mostly government-owned. It has operations in France and in a number of other countries in Europe, Asia, Africa, and Latin America. According to an AP report ( "Suez, Gaz de France to Merge", 2/25/2006), French Prime Minister "Villepin said Suez and GDF, as Gas de France is known, had been discussing for months a deal to bring together their 'close and complementary' activities in energy production, transport and distribution."
The deal was so hastily arranged that no details on the finances or who would be running the new company were given. This was a clear panic move, and a protectionist one by the French Government. Villepin underlined in his announcement the "strategic importance of energy for France."
Meanwhile, Suez was in the process of buying the remaining 49% of Belgium's #1 electrical utility Electrabel that it doesn't already own. Whether that deal will be affected is unknown.
British National Grid PLC is about to finalize deal to buy two Dutch gas networks from German utility RWE for about $500 million. National Grid is a three-year old company set up to run the national electric grad and gas pipelines in England and Wales, supplying local utilities.
At this time, things are heating up in the US market, thanks to a recent repeal of laws limiting utility deals. We've already covered fairly recent deals involving Duke Energy-Cinergy and FPL-Constellation).
This week Britain's National Grid PLC won an auction to buy KeySpan, a New York-based electrical and gas utility. The $9 billion cash deal is not finalized (another bidder may emerge). KeySpan is the #1 supplier of natural gas in the Northeastern US, and a major power plant operator. It already owns five small electrical companies in the Northeastern US and operates GridAmerica, a transmission consortium of a number of Midwestern US electrical companies. It also this month announced the acquisition of small Rhode Island gas utility.
And in Australia, gas and electric utility Alinta has raised its stake in Australia Gas Light (AGL) and made a $6.5 offer to buy the whole company, which is three times the size of Alinta. The idea is to merge the two companies then spilt them into separate energy and infrastructure companies. The deal would be one of the biggest of any kind in Australia.
That's an extraordinary amount of activity in this sector in one month. And most experts thinks that it will only trigger an even bigger feeding frenzy in upcoming months.
