Liberalisation of the electricity markets in the UK and Scandinavia has driven merger activity in these territories. This was evident in 1996 with U.S. companies taking over MEB, East Midlands Electricity and Northern Electric, with London Electricity likely to follow in early 1997. There could have been more, but intervention from the regulatory authorities prevented National Power from being acquired by Southern Company.

In Scandinavia, the combined electricity market of Sweden and Norway may be suffering from several problems, but that has not prevented the major players from increasing their market share through acquisition. Finland's IVO now controls Gullspang Kraft, Sweden's fourth-largest generator, and the number of distributors in Sweden continues to decline, with deals such as Sydkraft's acquisition of Orebro Energi.

Elsewhere in Europe, the passing of the EU Directive on the liberalisation of electricity markets is affecting industry consolidation. In Spain, the Spanish Government has approved Endesa's acquisition of controlling stakes in Sevilliana de Electricidad and Fecsa. In the Netherlands, the four largest generators (EPON, EPZ, EZH and UNA) are holding merger talks. In Germany, EVS and Badenwerk are pursuing a merger, and Bayernwerk is seeking to acquire the majority of Isar-Amperewerke. In Denmark, Vattenfall's acquisition of a 10-percent stake in NESA sparked concerns among the Danish Government when it was reported that Vattenfall was also interested in acquiring the 80-percent stake in the company held by the Gentofte, the local municipality.

Switzerland and some other countries on the fringe of the EU also saw merger activity in 1996. Electricite de France and RWE jointly acquired a 40-percent stake in Motor Colombus, which controls Aare-Tessin, the country's largest electricity company. Although privatisation of the Hungarian electricity industry slowed, due principally to governmental delays in approving prices increases, both AES and IVO acquired state-owned power plants. In the Czech Republic, the sale of strategic stakes in the eight regional distribution companies has been deferred again. However, Eastern Group acquired a small stake in one of the distributors and took a controlling interest in a cogeneration company. In Croatia, HEP signed an agreement with RWE to complete a power plant and agreed Memoranda of Understanding with Enron and Enserch covering two greenfield power stations.

Outside Europe, cross-border activity continued in Australia and South America. Following the sale of five distributors in 1995 to U.S. utilities, the State of Victoria sold two of its generators to the U.K.'s National Power and PowerGen. Sell-offs in Brazil commenced with the sale of Light to a consortia of Electricite de France, AES and Houston Industries and was followed by the sale of Cerj to a consortia of Chilectra of Chile, Endesa and Electricadade de Portugal.

One feature of the aquisition activity in 1996 has been the number of potential buyers. The sale of Cerj attracted some 29 bids and a similar number are reported to be interested in acquiring a stake in Bewag, the Berlin-based utility, and in HEW, the Hamburg-based utility. In Turkey, more than 50 bids for some 19,000 MW of greenfield and existing plant have been made, with particular interest in the gas-fired stations.

Globalisation of the utility industry is moving rapidly ahead, despite the concern expressed by some commentators who have encouraged shareholders in utilities to dismiss talk of globalisation in an industry whose product is consumed locally. Southern's acquisition of Consolidated Electric Power Asia was perhaps one of the most notable deals of the year, not only because of the transaction value, but also the market penetration it gives Southern in Asia. There were many others in the UK and Australia and also in China, where Electricite de France won the contest to develop China's first wholly foreign-owned BOT plant at Laibin.

There has been much talk of the multinational oil companies increasing their involvement in the power sector. Price Waterhouse's 1996 Petroleum Industry Review showed that five of the top 30 companies reported initiatives in electricity generation projects in letters to shareholders. For example, Arco, Conoco, Mobil and Total are bidding on the Turkish gas-fired plant. Also, Exxon Energy recently agreed to participate in building a 1000 MW plant in China.

While larger European electricity companies increased overseas activities in 1996, U.S. companies also continued to look invest huge cash balances. More than 60 percent of the leading U.S. electricity companies now have investments overseas. Many of the leading companies also increased their operations in the U.S. through acquisition. In 1995, most of the domestic U.S. mergers were between electricity companies with similar cost structures serving contiguous territories. The principal rationale was synergy, with estimated savings over a 10-year period of between $550 million and $2 billion, more than half of which were staff-related. t

Simon Allen is operations partner in the Price Waterhouse World Energy Group, which reviews M&A activity by electric utilities.

The Big Deals in 1996

Purchase

Acquirer Target Price $bn

Duke Power (US) Pan Energy (US) 7.7

Avon-GPU/Cinergy-(US) MEB (UK) 2.8

Enova (US) Pacific Enterprises (US) 2.8

Southern Company (US) CEPA (Asia) 2.7

ScottishPower (UK) Southern Water (UK) 2.7

Houston Industries (US) NorAm Energy (US) 2.4

EdF(F), AES, Houston Ind.(US) Light (Brazil) 2.3

Enron (US) Portland General (US) 2.1

Dominion Resources (US) East Midlands Elec (UK) 2.1

PowerGen (UK) Yallourn (Aust) 1.9

National Power (UK) Hazelwood (Aust) 1.9

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