E.ON Drops Endesa Bid; Agreement Reached With Enel, Acciona to Divide Up Assets

One Deal Abandoned…

In a dramatic final twist to what has been a long-running saga, E.ON yesterday agreed to revoke its 42-billion-euro bid for Endesa, effectively admitting defeat in its efforts to acquire control of the Spanish power company. The decision marks the end of a battle lasting more than a year, which has seen E.ON raise its offer several times, initially fending off a competing bid by Spain's Gas Natural. However, stake-taking by Spanish construction group Acciona and Italian utility Enel have left E.ON with little chance of acquiring its desired majority share in Endesa, leading to an announcement yesterday that it will not carry out its takeover offer, it would not accept any shares tendered to its offer to date, and it would undertake not to make a new takeover offer for Endesa in the next four years.

..And a New One Emerges

E.ON will not leave the party empty-handed though. In an effort to achieve some gains from its efforts over the last 18 months, E.ON has reached a backroom deal with Enel to carve up some of Endesa's assets. The deal will see E.ON gain control of a significant portfolio of assets in Spain, Italy, and France, as well as in Poland and Turkey, corresponding to a total value of around 10 billion euro (see box).

In exchange, E.ON will withdraw its offer, effectively clearing the way for Enel and Acciona—Endesa's largest shareholders—to pursue their own 41-euro-per share bid for the 56% of the company they do not currently control. Such a bid would value Endesa at 43.4 billion euro. The Enel-Acciona offer, which had recently been set back by six months following a ruling from Spanish stock market regulator CNMV, will now be able to proceed immediately (see Spain: 26 March 2007: E.ON Raises Endesa Bid, as Enel and Acciona Ordered to Freeze Offer for Six Months). The transfer of assets to E.ON will be dependent on such an offer succeeding.

E.ON appeared to remain philosophical about the turn of events, stating that the acquisition of the agreed portfolio of assets would give the company "an attractive platform for additional growth". However, the company will no doubt be facing great disappointment that its hard-fought battle for Endesa has ultimately ended in defeat. It had looked to be on the verge of success just a few months ago when its main rival Gas Natural withdrew its competing bid (see Spain: 2 February 2007:Gas Natural Withdraws Endesa Offer; E.ON Share Price Up), but gradual stake-building by both Enel and Endesa followed by an announcement that the two companies would cooperate in their efforts to take over Endesa saw E.ON's chances greatly diminish (see Spain: 23 March 2007:Acciona, Enel Look to Team Up on Endesa Bid). Wulf Bernotat, E.ON's chief executive and the key driver of the move for Endesa, said yesterday: "Acciona's and Enel's involvement in Endesa has made our original goal of acquiring a majority stake in Endesa impossible". E.ON had briefly entertained settling for a minority stake in the company, but Bernotat claimed that such a situation would have led to a "stalemate between the shareholders and triggered unpredictable lawsuits". Looking like it would struggle to achieve even 30% shareholder acceptance of its most recent offer, let along the 50.01% it was seeking, E.ON's appears to have taken one of the few options left to it by seeking out an agreement with its competitors.

Regulator Resigns

The long-running battle for Endesa has had repercussions not just for those companies involved, but also for regulators, governments, and the European Commission. Adding to the drama yesterday, the head of Spain's stock market regulator, which has engaged in an ongoing tussle with the Spanish government over the E.ON bid, announced that he would resign because of "serious reservations about significant…decisions taken by the board”. The regulator CNMV had fought to remove conditions placed on E.ON's bid, but faced increasing pressure from the Spanish government, which was reluctant to see Endesa come under foreign ownership. The trigger for the resignation of the regulator's chief Manuel Conthe was thought to have been the refusal by his board to consider disciplinary sanctions against Enel and Acciona for breaching Spanish takeover rules. Conthe's resignation will raise considerable doubts over the purported independence of Spain's regulatory agencies and is just one example of how the Endesa saga will have lasting implications beyond any final deal that is reached on Endesa's future.

Outlook and Implications

At first glance, Enel and Acciona look to be coming out the winners of the overall situation. They are likely jointly to acquire most of Endesa's Spanish operations as well as its Latin American assets. Enel, in particular, will be pleased to have succeeded in its latest takeover bid having been supplanted in its effort to acquire control of Franco-Belgian energy group Suez last year.

However, while E.ON will be disappointed to see its takeover bid fail, the acquisition of 10 billion euro in power assets will prove a not-insignificant consolation, particularly given the location of these assets in difficult-to-penetrate markets. Based on the assets listed, E.ON would become the fourth-largest energy group in Spain with a market share of 10%, the fourth-largest power producer in Italy, and the third-largest power company in France. Insiders have even suggested that it was largely these assets that were sought by E.ON anyway, with the company having little desire to take over Endesa's Latin American operations. Perhaps of greatest importance to the company, however, is the removal of the ongoing uncertainty that accompanies E.ON's takeover bid. The possibility of a prolonged tactical battle that would be likely to accompany a continued fight for Endesa has clearly been a cause for concern for investors. The clarity provided by yesterday's deal will now see such concerns alleviated. Such a message was apparent in share-market trading this morning, with E.ON's shares climbing by 7.58 euro or 7.4% shortly after market opening.

The situation for Enel and Acciona is perhaps not quite as clear, however. They will now look to put together a joint bid for Endesa and present it quickly to shareholders. However, with the European Commission continuing to spar with the Spanish government over its protectionist behaviour and the three-way deal to divide up Endesa yet to receive approval from regulators, it would perhaps be unwise to rule out any further surprises just yet.