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Europe's energy opening spurs a merger frenzy

The liberalization of the European energy market, which begins on Sunday, is coinciding with a merger frenzy among major players in the sector, abetted in some cases by governments that want to create national industrial champions in a strategic sector.

Recent months have seen several mega deals, particularly in Spain, where electricity giant Endesa has been the target of several takeover bids from different countries, while its peer Iberdrola has purchased Scottish Power.

In France, Suez and Gaz de France have spent more than a year attempting, without much success, to merge with government backing for a French champion.

And in the Netherlands the two main operators, Essent and Nuon, are seeking to get together.

"It's an unexpected byproduct of deregulation," said Colette Lewiner, energy expert analyst with CapGemini.

The main operators have amassed great cash piles and "are afraid to lose market share [in the their home markets] following deregulation, [so] they are looking to win elsewhere," Lewiner said.

The deals show no sign of letting up, with the European Commission requiring that the groups cede some assets when they arrive in a new market to avoid overconcentration.

For example, Spain's Acciona and Italy's Enel, on taking control of Endesa, will have to sell certain assets to unsuccessful Endesa suitor EON of Germany. Suez and Gaz de France also have had to resign themselves to ceding assets in Belgium to bring the commission around to their proposed merger.

Yet the trend for such mega mergers can partly be explained by the structure of the energy market. In a market dominated by only a handful of producers, the leading groups in Europe are seeking to increase their size still further to boost their market power, which will enable them to influence prices.

"Structurally, the opening up [of the market] can only lead to consolidation, as the producer requires the greatest possible power over the market to have an effect on prices," said Patrick Larradet, an administrator with the French electricity transport network.

Acting alongside conglomerates, governments too have had a hand in promoting big tie-ups, even if they are not directly at the helm, as they try to create conditions favorable to national industrial powerhouses.

The French government was heavily implicated in the Suez-Gaz de France merger process, while Madrid's Socialist government fought tooth and nail in order to keep Endesa Spanish, despite European Commission opposition.

The commission maintains that it is essential to break the link between transport operations and production. But some major players, such as France and Germany, oppose the separation, seeing it as a means of depriving their national firms of clout and revenue.
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