Energy giants square up at crossroads

Published on Saturday 19 April 2008 13:56

Last year was transformational for ScottishPower owner Iberdrola, this one could determine its fate, writes Terry Murden in Bilbao.

SIX months ago, amid the historic splendour of the Madrid Stock Exchange, Ignacio Sanchez Galan was in bullish mood as he spoke for 40 minutes about his company's plans for expansion that would consolidate it among the world's top four energy companies.

Last week, at a media conference in the modern magnificence of Bilbao's Guggenheim Museum, the chairman and chief executive of Iberdrola took almost as long to describe a year that had transformed the group, though this time it sounded more like a long and emotional defence strategy.

Iberdrola, which owns ScottishPower, is at a crossroads. It faces a potential bid from French state-controlled Electricit de France (EdF), while being among the five interested buyers of British Energy, the UK nuclear power company. There is also talk of a merger with Gas Natural, its Spanish rival. If last year was transformational for Iberdrola, this one could determine its fate.

Galan took centre stage at the Guggenheim, where he faced a volley of questions from among 170 journalists bearing down on him in the auditorium. He swept aside repeated questions about some form of bid activity, insisting that any merger, triggered by either Iberdrola or a bidder for the company, would have to meet its self-ordained criteria on shareholder value.

There had been no formal contact with any party, and when asked if that meant there had been informal contact, he smiled and said there were many occasions when he would meet his counterparts, including the summit at Davos, but the fact remained that nothing was under discussion.

"We are talking about speculation and rumour, and nothing but speculation and rumour," he said, responding to another question about a tie-up with Gas Natural which some in Spain see as a means to create a Spanish energy champion.

"There is no agreement and no project for agreement," he said, at least four times, insisting later that "I do not think I can say this any more clearly or louder".

But the special emphasis he placed on the 44% increase in the dividend, the transparency and integrity of Iberdrola, and its prospects for growth, made it clear that he was staking the company's future on its track record and the management's role in multiplying market capitalisation by 4.5 times to ?52bn. As predicted, he demanded that EdF makes its position known, either as a lone bidder or with Spanish construction company ACS, its rumoured partner.

In the absence of a UK-style deadline, Iberdrola has been forced to take the matter to a commercial court, but EdF has challenged the action and the sense of frustration among Iberdrola's senior staff is palpable.

EdF's frustrating tactics concern some at ScottishPower because of its reputation for making big changes in contrast to the Spanish firm's deliberate strategy to empower local management and leave the business to run more or less autonomously. Thus, everything, from the executives to the brand, has been left in place.

But EdF is also distracted by the speculation surrounding British Energy, for which it is a front runner with Germany's RWE to make an 11bn bid. Questions on Iberdrola's joining the bidding battle at least gave Galan a chance to move back on to the front foot, but he offered few clues to the group's interest beyond saying it was the board's responsibility to analyse opportunities and that "this is an opportunity".

Jos Luis del Valle, who combines his role as ScottishPower chief executive with that of director of strategy and development, was a little more forthcoming. "I do not think we are there yet (on British Energy]. We have expressed an interest in being involved in the nuclear development of the UK. We have nuclear expertise so it makes a lot of sense to put the two (ScottishPower and British Energy] together."

Del Valle believes the company could be agreeable to letting EdF or RWE acquire British Energy and then buy some of the sites earmarked for future power stations in the UK. While Spain has no active nuclear build programme, Iberdrola does run nuclear stations and builds them elsewhere. To be a junior partner in the carve-up of British Energy would give the company a foothold in the UK market while avoiding the huge cost involved in buying the company outright. The Nuclear Decommissioning Authority also has sites which could be of interest to Iberdrola.

It appears, therefore, that the company is moving towards some form of partnership, though neither Del Valle nor Galan gave any clues as to who that might be.

The bid process is complicated by the option for acquiring the whole of British Energy or just the 35.2% owned by the Government. The auction was sparked on January 10 when the Government said it would sanction a new generation of nuclear power plants. The chairman of British Energy, Adrian Montague, briefed his advisers at NM Rothschild and five potential bidders emerged, with Eon of Germany, and Britain's Centrica – owner of British and Scottish Gas – completing the interested parties.

Latterly, the Swedish state-owned giant Vattenfall is thought to be keeping a close eye on developments and has appointed Citigroup as adviser.

Centrica, which needs more capacity, is thought unable to finance a deal on its own, and could partner EdF if the competition authorities would allow it. RWE has already tabled a 700p a share indicative cash offer.

Ultimately, a combination of owners is thought desirable by those who also believe it wise to have a mix of designs. This would avoid any potential black-out in the event of a problem at one station causing others to be shut down. It will be one more factor in Iberdrola's thinking as it contemplates its options over the next month.