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A Continent United? Some Thoughts on Prospects for a Single Energy Market in Europe

Fortnightly Magazine - January 15 2000

Nigel Burton, managing director of the global investment banking utilities group at Deutsche Bank in London, "The distribution of size of utilities in Europe is quite different than in the U.S. In the U.S. market there is a larger number of major utilities of similar size, whereas in the E.U. there is a concentration in a much smaller number of large power companies. These contrasting market structures have a major impact on competitive market strategies, and on merger and acquisition activities."

In the future there will be high-value power industry mergers, even by the current mega standards of the $110 billion Sprint acquisition, the Exxon/Mobil deal at $81 billion, or the Mannesmann $125 billion hostile takeover bid proposed by Britain's Vodafone Airtouch. There is a lot of money at stake in the power market merger and acquisition game, and firms should move now to best exploit opportunities in the new market.

In the longer term, power imports from the former Soviet Eastern Block countries or from Russia are a distinct possibility. Michael Moore, partner at Amerex in Houston, notes that "Eastern European countries, although not covered by the E.C. electricity directive, are beginning to restructure their power markets."

John Barr, managing director of SG Barr Devlin in New York says, "The strategic rationale driving European utility mergers and cross-border combinations are the same as those that have fueled the restructuring of U.S. utilities for the past five years: cost reduction and revenue enhancement. As Europe's large investor-owned utilities regain equilibrium in the new markets, through a combination of horizontal mergers, joint ventures and vertical disaggregations, we believe they will return their attentions to the U.S. markets. At that point, which for some could be before the end of 2000, we would look for a resumption of inward-bound acquisitions, following on the early moves by ScottishPower and National Grid."

British Energy's increasing investments in U.S. nuclear operations through its AmerGen joint venture with Peco is one example. With AmerGen's recent acquisitions of the Clinton and the Three Mile Island Unit 1 nuclear plants, Robin Jeffrey, AmerGen president and executive director of British Energy, North America, comments that "AmerGen has become a true part of the U.S. power generation scene."

In many of these countries, restructuring will involve first privatizing the state-owned utilities. That is slowly beginning in Poland with the country's initial sale of generating facilities. It will take four or five years, but it is part of the Europower equation.

For U.S. firms entering the European market, there are both distinct advantages and disadvantages. For example, new entrants are unencumbered by legacy positions, which can make it easier to formulate unique competitive positions. Innovation is the key ingredient.

Even for U.S. companies without any plans for expanding into Europe, close observation of European market developments can be valuable for assessment of strategic options, and for gauging the success of alternative business models for competitive environments. For example, the results of branding and pricing strategies in German retail marketing may provide a model for U.S. and other E.U. companies in developing marketing strategies.