Call it a case of "two rights making a wrong."
Thanks to a series of rapid-fire developments ranging from Dusseldorf down to Madrid and back up to Brussels, it looks like the world's largest utility company is about to get a whole lot bigger.
As Euro-investors surely know, Spanish electric utility company Endesa
After mulling the interloper's offer for five months, the CNE agreed that $34 billion was indeed more than $27 billion. What's more, E.ON was offering an all-cash buyout, in contrast to Gas Natural's cash-and-stock tender. And so, naturally, the CNE ... set stricter conditions for the Germans than it had for the local bidder. Whereas Gas Natural had been permitted to proceed with its bid so long as it promised to sell off 4300 megawatts worth of electric generation capacity and reduce its stake in gas distributor Enagas to a bare minimum, the caveats to E.ON's bid were positively draconian. Post-merger, the 19 conditions the Germans would have had to fulfill included:
- selling off about a third of Endesa's electric generation assets, capable of producing 7600 megawatts of power.
- selling off part of the combined firm's nuclear and coal-fired generating assets ...
- ... and all assets in the Balearic and Canary Islands, as well as two North African territories.
- keeping Endesa as a separate entity from E.ON proper.
- following through on Endesa's previously planned investments.
- maintaining Endesa's pre-merger levels of gas supplies to Spanish customers.
- limiting the debt it undertook.
In addition to putting E.ON's hoped-for economies of scale at risk by drastically limiting the size of the to-be-combined enterprise, the debt restriction in particular jeopardized E.ON's ability to take out sufficient cash to finance its bid. So one can understand why the company, while welcoming the approval of its merger plans, was less than thrilled with the caveats. E.ON soon complained to the European Commission's Competition Commissioner, headed by Ms. Neelie Kroes (a personage with whom we're well familiar, as you can read about here, here, and here.)
To bring this story up to present day, three key developments took place on Tuesday. First, early in the morning, we learned that Ms. Kroes' Commission rebuked Spain for allowing the CNE to set the disputed conditions in the first place, and ordered that E.ON be permitted to acquire Endesa without fulfilling any of them. Second, Spanish construction company (why?) Acciona announced it had acquired a 10% stake in Endesa, and was interested in buying up to 24.9% (the limit before merger approval-requirements kick in). Third and finally, E.ON trumped Acciona's purchase price by raising its own initial bid 38% to $47 billion (beating Tuesday's closing price for Endesa shares by 8%).
It's a complicated story, no doubt. What I'd like to do in this column is break it down into three useful "takeaways" that should help U.S. investors make sense of all these goings-on -- and explain what each implies for our own European-related investments. To keep things simple, I'll characterize these as two "rights," and one "wrong."
Right No. 1: Nationalist jingoism busted
From an absolute perspective, Spain was absolutely wrong when it meddled in the free market by imposing strict conditions on E.ON's purchase of Endesa. The CNE's more lenient conditions previously offered to Gas Natural when it tried to acquire Endesa -- so as to form a "national champion" utility akin to telecom giant TelefonicaSA
Were all other things equal -- which they aren't, as I'll explain below -- I'd wholeheartedly have endorsed the Competition Commission's putting its foot down here, and demanding that Spain treat "foreign" companies just the same as it treats its own.
Right No. 2: Shareholders win
When regulators step out of the way and permit free markets to work as good old Adam Smith intended, shareholders win. I have little doubt that the CNE imposed stricter conditions on E.ON's bid than on Gas Natural's, in hopes that the former would bow out and allow the latter to proceed with acquiring Endesa. If that had occurred, then Endesa shareholders would have involuntarily paid $7 billion for the "privilege" of keeping Endesa Spanish.
National pride may warm the heart, but it does little to fill the wallet. In contrast, now that the Competition Commission has forced Spain to swallow its pride, E.ON has already upped its bid to $47 billion -- raising the "national pride premium" to a cool $20 billion. Hey, call me a Tory if you want, but if Prince Charles ever offers us $20 billion to buy the Liberty Bell, I'd vote we take the money and run.
Two rights make a wrong: Supra-nationalist jingoism triumphant
But here's where the whole thing goes wrong. The EU's Competition Commission didn't just strike a blow for free markets yesterday -- it struck a blow for Brussels' supremacy over the various EU states' regulators.
As the BBC put it back in August, when the CNE imposed its conditions on this deal -- which the Competition Commission had already unconditionally approved -- it constituted a "direct challenge to the authority of the European Commission." In other words, despite its happy outcome for E.ON, and for Endesa shareholders, yesterday's decision appears to be more about supra-national bureaucratic infighting than about any laissez-faire opening of insular national markets to the free movement of capital.
The more so because the Competition Commission has rudely failed to shake Adam Smith's Invisible Hand in recent years. It incessantly houndedMicrosoft
The fact that it now appears to support competition within Europe doesn't change that a whit.
Learn more about Germany's E.ON in our Winter Olympics story "1001 Teutonic Nights."
Or get to know EU's new supra-nationalist competition commissioner, Neelie Kroes, in:
Fool contributor Rich Smith does not own shares of any company named above, but he still feels their au bon pain. This bit of trivia brought to you courtesy of the Motley Fool's globe-striding disclosure policy.