FRANKFURT/PARIS (Reuters) - The merger of Suez and Gaz de France to create Europe’s third largest utility will make takeovers on the continent costlier as it vies for market share with peers such as EDF and E.ON.
“You have a new player on the block chasing the same scarce assets,” said Vinay Sharma, who helps manage some 40 billion euros at WestLB’s Mellon Asset Management unit.
“This will force any bidder to try harder.”
Takeovers in the utilities sector rose to a record $420 billion (210 billion pounds) in 2006, according to a study published by KPMG in May 2007, with energy markets in Europe opening to competition and companies awash with cash from soaring energy prices.
Acquisitions in the sector have already become more expensive. The DJ Stoxx utilities index .SX6P has risen 22 percent in the past twelve months, compared with a 12 percent increase of the STOXX 50 index .
Recent transactions, including the takeover of Spanish utility Endesa by Italy’s Enel (ENEI.MI) and Spain’s Acciona (ANA.MC), and the acquisition of Scottish Power SPL.W by Iberdrola (IBE.MC), valued the targets between 7 and 10 times earnings before interest, taxes, depreciation and amortization (EBITDA), Unicredit equity analyst Karin Brinkmann said.
A merged GDF-Suez will come under pressure from investors to use its finances more effectively and spend aggressively on energy markets that soared on bumper commodity prices.
The company’s proforma debt at the end of December 2006 would have been at 13.9 billion euros (9.4 billion pounds). This gives the company scope to spend some 25 billion euros, London-based UBS analyst Per Lekander estimates.
Companies in the energy sector are more expensive than those in other sectors, as utility stocks are amongst the most highly valued in Europe, according to a study from Citigroup from August 30.
The sector trades at 14 times estimated 2008 earnings, with only retail and food & beverage trading higher, both at around 16 times predicted 2008 earnings. Any takeover of a listed company would require a premium on top of the valuation.
A merged GDF-Suez, minus Suez’s LYOE.PA environment unit, is valued at around 78 billion euros, and it will vie with Electricite de France (EDF.PA) and Germany’s E.ON EONG.DE.
GDF GAZ.PA and Suez expect to finalise the merger to create Europe’s third-largest utility by market value in the first half of next year, and it may then turn its sights to expansion.
Others targets would be Russian power providers being sold by the Russian government, Turkish energy assets and renewable energy providers such as windfarms, WestLB’s Sharma said.
GDF Chief Executive Jean-Francois Cirelli said on Monday he plans to invest in gas production, liquefied natural gas and nuclear power.
Suez fully took over Electrabel in one of its most recent transactions and has been invited by Bulgaria to bid for a 49 percent stake in a nuclear power plant in the country, worth a total of 4 billion euros.
“GDF-Suez will have the financial clout to bid more for takeovers, increasing competition for acquisitions,” Credit Suisse’ Kuplent said.
But it will have to play catch up with E.ON, which recently announced a 60 billion euro investment program for the next four years, including for takeovers in Russia, Turkey and south-eastern Europe. E.ON also said it would consider capital measures for a large takeover.
RWE shares have risen in several sessions since May on talk EDF is negotiating with the German government to buy RWE (RWEG.DE), currently Europe’s third-largest utility by sales.
GDF-Suez may hold back from making acquisitions if it decides to focus on rebuilding its power plants and energy networks.
“In the medium term they are busy with themselves, in the longer term they may have to replace their ageing power stations and networks,” said Unicredit’s Brinkmann, speaking from Munich.
It could also possibly be at a disadvantage to its peers in a spending spree given the role of the French state, which will have a third of the seats on the GDF-Suez board and a blocking minority stake.
“Some countries may also consider them a state-controlled company, and therefore not wish that they participate in a given auction,” Brinkmann said.