Spaniards' $29b tilt at windmills

Sydney Morning Herald
Thursday 30/11/2006 Page: 26

MADRID: Spanish power company Iberdrola has agreed to buy ScottishPower for $US22.5 billion ($28.9 billion), a move that would create one of Europe's largest utilities.

The board of ScottishPower said on Tuesday it would approve the bid, which would amount to 777p a share, slightly more than half of that in cash.

Iberdrola is Spain's second largest power company, behind Endesa, and one of the world's leading producers of wind power.

The deal with ScottishPower would enable it to increase its wind power capacity by as much as 50 per cent, analysts said, and to broaden its access not only to the British market but also to the American one, where it has been looking to expand.

Spanish companies, buoyed by a robust economic expansion that has lasted more than a decade, have been aggressively looking abroad for investment opportunities in recent years, particularly in Latin America and, more recently, in Britain.

The deal would allow Iberdrola to lower costs and to diversify beyond the Spanish market, where opportunities for growth are increasingly limited. "Together we will be able to guarantee immediate synergies and to access future economies of scale," Ignacio Galan, the chief executive of Iberdrola, said in a statement.

"The resulting group will be very well positioned for the future European energy market and will have a strong platform for growth, especially in renewable energies, a market in which it will be world leader." Iberdrola, which is based in Bilbao, in northern Spain, has operations in 28 countries and had $US15.3 billion in sales last year. The combined company would be worth $US84 billion, the companies said.

ScottishPower, based in Glasgow, has been considered a takeover target for more than 18 months, after a foray into the US failed to generate the expected revenue.

There has been heavy activity recently in Spain's energy market, with E.On of Germany and Gas Natural of Spain vying for Endesa. This led analysts to speculate that Iberdrola saw itself as a possible takeover target.

"This deal is away for the company's directors to protect themselves from takeovers from abroad and within Spain," said Jordi Padilla, the director of equities at Atlas Capital in Madrid.

Over the longer term, Mr Padilla said, the deal could allow Iberdrola to eventually make a move for a Spanish energy company, such as Gas Natural, without having to subject itself to Spanish regulations, which would probably require it to sell assets to avert monopoly concerns.

By joining with ScottishPower, he said,"a large part of its business would be outside of Spain, so regulatory authority could lie with the European Union rather than Spain if it decides to make a move for a Spanish company".

"Iberdrola is offering what we considered a high price for ScottishPower," Citigroup said in a note. "We estimate a slightly negative impact in our Iberdrola evaluation, although we consider that the company's medium/long-term fundamentals could improve, particularly in the wind power business." The deal, which Iberdrola said should be completed in April, is subject to approval from European regulators and shareholders of both companies.