Gas Natural to Buy Union Fenosa for 16 bil. Euro

The Deal

Late on 30 July, Gas Natural agreed to purchase utility Union Fenosa, in a deal valuing the target at around 16.75 billion euro (US$26.3 billion). Gas Natural's plans, agreed with Union Fenosa's largest shareholder, Spanish construction company Actividades de Construccion y Servicios (ACS), call for a sale in two tranches. The buyer will acquire 9.99% of Union Fenosa in the next week at 18.33 euro per share. Assuming Gas Natural wins approval from the Spanish energy regulator to raise its stake above 10%, it would then purchase another 35.3% from ACS, which under Spanish law will trigger a mandatory offer for the whole company. An offer of 16.75 billion euro would represent roughly a 15% premium to Union Fenosa's most recent market value of 14.57 billion euro, and it would be 57% higher than its value before it emerged as a takeover target after ACS announced its intention to sell its stake on 17 July.

Success at Last?

Gas Natural has previously failed in two takeover attempts. In 2003 it made a hostile 25-billion-euro offer for Iberdrola that Spain's competition regulator eventually blocked. Two years later it made a 23-billion-euro offer for Endesa, but backed away after E.ON, and then Enel, emerged as front-runners. Speculation has been rife in recent weeks that Gas Natural would bid for Iberdrola again; however, the company's management has persistently denied this would happen.

Gas Natural has been eager to expand its electricity generation operations to reduce its dependence on gas sales and to use its gas trading as leverage to supply generators. Union Fenosa produces the bulk of its energy through combined-cycle generators that are powered by natural gas.

Eni's Dilemma

A deal for Union Fenosa presents Italy's Eni with an investment decision. The Italian company already owns 50% of Union Fenosa's gas unit and has an option to buy the remaining half should a third company acquire Union Fenosa. Unión Fenosa Gas sells 2.5 bcm of gas per year to Union Fenosa's combine-cycle gas turbine (CCGT) plants.

Outlook and Implications

A tie-up between Gas Natural and Union Fenosa would form an energy company with a value of about 30 billion euro before asset disposals.

Gas Natural has around 5.6 million gas distribution customers in Spain. The Group's generating portfolio currently stands at 6,474MW of installed potential. It presently operates 3,600MW of combined-cycle potential in Spain, and is the fifth-biggest operator in the electricity market. It is the leader in the Spanish gas distribution and supply market. Union Fenosa's installed capacity in Spain is 8,865MW, and its installed capacity of CCGTs in Spain is 3,200MW. Nearest competitor Endesa has installed capacity of 24,477MW in Spain. Whether or not regulator CNE decides the Gas Natural-Union Fenosa tie-up would damage nascent competition in Spain remains to be seen. Although the MIBEL exchange is running, the equivalent MIBGAS has been slow to get off the ground.

Under a strategic plan from 2008–12, Gas Natural aims to become a vertically integrated international gas and LNG operator by exporting its Spanish model to new markets and investing 12.5 billion euro by 2012. Among Gas Natural's 2012 targets is to build a gas portfolio of 35 bcm, some 10,000MW of installed generation capacity worldwide, and a customer base of 16 million, of which 6.7 million will be located in Spain, cementing its role as market leader.

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