[A-List] EU developments: energy sector
Michael.Keaney at mbs.fi
Mon Mar 25 08:58:44 MST 2002
Europe turns on to rich pickings in UK utilities
Britain's fragmented energy market is beginning to consolidate at last - to the long-term benefit of its new European owners, writes Mark Milner
Monday March 25, 2002
An intriguing and instructive example of corporate cultural differences unfolded at the end of last week when Germany utility RWE finally got round to tabling its bid for Innogy, Britain's biggest electricity supplier.
RWE is paying £3.1bn for Innogy and taking on £2.1bn of its debt, bringing RWE's recent spending on high profile acquisitions - including Britain's Thames Water - to 34bn euros.
The acquisition is billed as a marriage made in heaven. Innogy shareholders are getting a hefty 30% plus premium to the market value of their shares, the day before news of a takeover approach broke. Not to be sniffed at in these turbulent stock market times.
Nor, it would appear, should staff be trembling in their shoes in fear of massive job losses. True, there will be benefits - cutting out duplicate spending - but the deal is built on value creation, not cost cutting, according to senior executives on both sides.
In return, RWE, which is limited in domestic expansion because it is already very big - gets a key position in the British energy market as well as Innogy's expertise in prospering in a liberalised market.
RWE is keen on that aspect. Though the opening up of other energy markets is proceeding at a snail's pace thanks to the French government's determination to protect its national champion, Electricité de France (EdF), it will happen. Those who have already learned to play by the very different rules will have a serious competitive advantage.
Finally, RWE will hope to be able to market Innogy's npower energy services to Thames Water customers - bundling, to use the industry jargon. RWE, like Innogy, sees itself as a multi-utility company offering a range of services, focusing on the opportunities for cross-selling provided by an extensive customer base.
The only fly in the ointment came in the form of very pointed questioning about whether RWE was overpaying for Innogy as, according to some analysts, it did for Thames Water. Certainly Innogy shareholders are likely to think they got a pretty good deal as they bank RWE's cheque.
On the other side of the equation, however, the combination of Innogy and Thames will give RWE a powerful position in the UK utilities market.
Liberalisation of the UK market has seen the utilities groups split into bite-sized portions ideal for hungry predators to snap up. For some of the big continental players, whose size gives them relatively low capital costs, it is an opportunity not to be missed.
The Innogy deal will mean that more than half the generating capacity in England and Wales will be in foreign ownership (EdF, which owns London Electricity, is another big player in the UK), while the City is already running the slide rule over other acquisition candidates.
The irony is that, having fragmented in the post-liberalisation world, the UK utilities industry is now beginning to consolidate - this time on a customer- driven basis rather than a supply approach. But it is likely to happen under largely foreign ownership, which has nipped in before a new British utilities giant has had time to emerge.
Innogy shareholders may be patting themselves on the back as they count their short-term gains, but it is RWE and its shareholders which are developing a long term position.
Mark Milner is the Guardian's deputy financial editor
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Mercuria Business School
michael.keaney at mbs.fi
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