Analysis: European utilities retrench as cross-border deals lose appeal
19/04/2018 16:40
* Rise of nationalism dampens cross-border merger plans
* Hungary, Poland act against foreign ownership of utilities
* Foreign ownership raises issues in core EU states too
By Geert De Clercq and Christoph Steitz
PARIS/FRANKFURT, April 19 (Reuters) - European utility
companies are retrenching in their home markets and looking to
unwind debt-financed cross-border mergers deals as increasingly
nationalist governments balk at foreign ownership of strategic
power supplies.
Hungary was one of the first European countries to turn
against foreign ownership of utilities back in 2013 but there
are growing signs that borders are springing up again in an
industry that has struggled to make international deals pay off.
Several European utilities were lining up to buy German
utility RWE's RWEG.DE subsidiary Innogy IGY.DE but in March
RWE and domestic rival E.ON EONGn.DE agreed to carve up the
renewable energy firm themselves in an all-German deal.
urn:newsml:reuters.com:*:nL5N1QT018
Then this week, French electricity retailer Direct Energie
DIREN.PA , the biggest independent challenger to market leader
EDF EDF.PA , went to French energy giant Total TOTF.PA in
another all-domestic deal. urn:newsml:reuters.com:*:nL8N1RV0ZB
"In a business as sovereign and strategic as utilities, it
is hard to see major deals materialising in today's Europe,"
said a banker in Paris who has worked on cross-border mergers
and acquisitions (M&A) in the utilities sector.
Bankers say the German deal, hammered out within two months,
was partly aimed at keeping Innogy's prized assets out of
foreign hands and the backlash against foreign owners is now
fuelling speculation some big cross-border deals may be unwound.
EDF's Italian energy subsidiary Edison EDNn.MI , the
third-biggest power producer in Italy, is seen as a prime
example of a legacy cross-border investment ripe for unwinding.
Edison's oil and gas activities no longer fit EDF's
low-carbon strategy and its prospects of winning retail market
share from Enel ENEI.MI , in which the Italian state has a 24
percent stake, look limited.
"The Italians have never accepted that Edison is no longer
Italian," said the Paris banker, adding that the firm's growth
outlook in Italy would always be constrained by its French
ownership.
Sources told Reuters this month that Edison had selected
banks to sell its oil and gas exploration and production
division - joining other utility firms that have sold off
hydrocarbon assets as they grapple with sluggish energy demand,
low wholesale prices and a surge in cleaner, renewable energy.
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TAKEOVER WAVE
Spain's Endesa ELE.MC is another asset owned by a foreign
utility seen as a potential candidate for resale. Italy's Enel,
Europe's biggest utility, outbid E.ON for Endesa in 2007 during
a spate of cross-border European utility mergers.
While Enel, which owns 70.1 percent of Endesa, has denied it
has plans to sell, its control has drawn criticism from Spanish
politicians who say Endesa is not investing enough locally and
pays too much in dividends to its owners. urn:newsml:reuters.com:*:nL8N1QX5J8
Enel Chief Executive Francesco Starace acknowledged
nationalism was having an impact on utilities M&A in Europe.
"There is some but I don't think Europe's big countries can
afford to be nationalistic because they would need really deep
pockets to keep these companies off their markets," he told
Reuters.
Edison and EDF declined to comment.
The spate of cross-border utility takeovers before and just
after the 2008 financial crisis came as 10 countries joined the
European Union in its biggest enlargement and European power
companies saw a chance to become regional power giants.
E.ON spent 11.5 billion euros ($14.2 billion) on foreign
assets after losing the battle for Endesa, RWE bought Britain's
npower, EDF bought Edison and British Energy EDFBR.UL ,
France's Engie ENGIE.PA bought Britain's International Power
IPWG.PK , Spain's Iberdrola IBE.MC bought Scottish Power and
Sweden's Vattenfall VATN.UL bought Dutch Nuon Energy.
But the collapse in wholesale power prices since has
undermined many of these debt-fueled deals. Engie, E.ON and
Vattenfall alone have written a combined 34 billion euros at
least off the value of their international acquisitions.
'A VERY NATIONAL BUSINESS'
Now, not much of the cross-border deal euphoria is left.
With nationalists in power in Hungary, Poland and Austria,
and right-wing parties on the rise in other large European
countries, utilities are feeling a backlash against the
internationalisation they embraced a decade earlier.
"This is still a very national business," said a senior
banker who worked on the Innogy deal. "The most difficult
situations in a big transaction are those that involve players
from different countries."
While potential foreign ownership had not become a political
issue ahead of the Innogy deal, German politicians publicly
opposed attempts by China State Grid Corp STGRD.UL to buy a
stake in German grid operator 50Hertz from Australian fund IFM.
urn:newsml:reuters.com:*:nL8N1QD5QI
A source familiar with the situation told Reuters that
German officials had encouraged Belgium's Elia ELI.BR - the
leading shareholding in 50Hertz - to increase its stake rather
than let State Grid buy it. urn:newsml:reuters.com:*:nL8N1R51GD
The first moves against international ownership of utilities
came in Hungary, where right-wing populist Prime Minister Viktor
Orban said in 2013 the state would seek to buy back Hungarian
assets of E.ON, RWE, EDF, Engie and Italy's Eni ENI.MI .
Since then, Orban has imposed sharp cuts in energy prices,
making mostly foreign-owned firms foot the bill, and several
foreign utilities have sold their operations to the state.
In Poland, EDF and Engie felt the sting of nationalist
energy policies in 2016 when the ruling Law and Justice party
put assets owned by French utilities on a list of firms deemed
important for energy security, to block their potential sale.
EDF, which had been in talks with Czech firm EPH and IFM
about selling its assets in Poland, was ultimately forced to
sell to Polish state-run firms.
"Has there ever been a big value-creating cross-border M&A
deal in the utility world? I would have to think very hard to
find an answer," said an M&A banker based in Frankfurt, who has
worked on German and European sector deals.
($1 = 0.8083 euros)
(Additional reporting by Stephen Jewkes in Milan, Andres
Gonzalez and Jose Elias Rodriguez in Madrid, Krisztina Than in
Budapest and Agnieszka Barteczko in Warsaw; writing by Geert De
Clercq; editing by David Clarke)
((geert.declercq@thomsonreuters.com; +33 14949 5343; Reuters
Messaging: Twitter: @gvdeclercq))