Dresdner Kleinwort is ahead of the advisory pack in terms of deal value in European electricity mergers and acquisitions this year. The bank’s utilities and natural resources team talk to Edward Russell-Walling about their recent success in one of the most difficult deals in cross-border history, Enel’s takeover of Endesa.

From drilling to generation, the energy business has been a positive powerhouse of corporate activity, driven by high oil prices or the forces of consolidation. Dresdner Kleinwort’s utilities and natural resources team has maintained a high profile across this particular front, from European utilities to Russian oil and gas.

Dresdner Kleinwort claims to have the longest-established utilities sector team in the City of London, set up in the late 1980s when the UK electricity industry was preparing for privatisation. It has not been idle since then, and by mid-2007 it was leading the year-to-date advisory league by deal value in European electricity mergers and acquisitions (M&A).

The clincher for that top ranking was the bank’s work on the extraordinary takeover of Endesa by Italy’s Enel. The deal became one of the most drawn-out and difficult in cross-border history, involving players from Spain, Italy and Germany, and stoking up national tensions to the extent that the European Commission felt obliged to intervene.

Into the fray with Enel

Dresdner Kleinwort became an adviser to Enel in September 2005, the month in which Spain’s electricity industry was thrown into foment. Banco Santander sold a large strategic stake in Union Fenoza – the third-largest utility – to Spanish construction company ACS. And Gaz Natural launched a bid for the privatised national incumbent, Endesa.

At €21.30 a share, the hostile offer was hardly of knock-out proportions, valuing Endesa at €22.5bn, little more than half its eventual price. But Gaz Natural believed that the politicians would never allow the company to fall into non-Spanish hands. From the other side of the border, however, Spain appeared a very attractive market, relatively protected and with higher electricity demand growth than much of the rest of Europe. Slide rules were dusted off in a number of foreign centres.

In Rome, Enel was pondering its own future growth options. As the largest Italian utility by far, acquisition in its own regulated market was off limits. But it had identified Spain as a key market for expansion some years earlier and had bought the number four player, Electra de Viesgo. So it was already on good terms with the regulator and national politicians, maintaining a non-confrontational relationship that was to pay off in the long term.

As the rumblings of change sounded in Spain, Enel did not feel able to crash the party uninvited, but hired Dresdner Kleinwort to help it to evaluate all the permutations and opportunities that might arise.

As a Spanish-speaking Italian who had spent much of his career working on Iberian and South American projects, Vittorio Perona, the bank’s global head of utilities and natural resources, was uniquely qualified for the job. Over time, Dresdner Kleinwort would build a financial model of the entire Spanish power sector to recreate the likely effect of every possible combination of alliances – and there were many of those.

Cash counter offer

After the Spanish anti-trust authorities voiced their opposition to the Gaz Natural offer at the start of 2006, Germany’s Eon launched an all cash counter offer of €27.50 per share. It needed a southern European presence and was drawn by Endesa’s South American assets. By then, politicians and lawyers alike were enthusiastically taking up the affair.

Spain’s energy regulator approved the Eon bid but insisted it would have to sell Endesa’s nuclear and coal-fired plants. That, in turn, outraged the Brussels authorities, which claimed that the conditions broke European merger rules. Then Acciona, another Spanish construction company, bought 10% of Endesa’s stock. Although few realised it at the time, the game had taken a pivotal turn. By the end of 2006, Acciona had increased its stake to 21.3%.

This February, Eon increased its offer to €38.75, valuing Endesa at €41.1bn. One of the quirks of the Spanish takeover code then came into play, obliging Eon to wait for its offer to complete, forbidden either to buy shares or to raise its offer price. “Enel had no contact with Acciona,” Mr Perona says. “But it realised that if it bought 25% of Endesa [the maximum without triggering a full bid], the combined shareholdings would make it difficult for Eon to buy the company.”

If Eon succeeded, no harm done, and there might even be some assets to be negotiated away. If not, the road could be open for Enel to acquire the entire enterprise. So Enel raided the market, buying 10% of Endesa’s shares (at €39) in less than half an hour. Two days later, it acquired options over a further 15%.

“We were still not sure what the end game would be,” Mr Perona recalls. “At worst, it would be a ménàge a trois [with Enel, Eon and Acciona]. If that didn’t work, we could just divide the company between us.”

On the news that Acciona and Enel were considering a joint offer, the Madrid stock exchange relented, allowing Eon to revise its bid and extend the closing date. So at the end of March, it increased its offer to €40.

It quickly became clear that this was not going to be enough. “Enel went to Eon and said, effectively, none of us wants a ménàge a trois, so we will give you certain assets if you walk away,” says Mr Perona.

And that is exactly what happened. At the beginning of April, Endesa promised to sell Viesgo, some of Endesa’s Spanish generating assets and all its other European assets to Eon for €10bn. Eon withdrew its offer. At the same time, Acciona secured an option to sell its 25% stake to Enel between 2010 and 2017 at a minimum price of €40.16. Acciona and Enel then launched a formal offer of €41.30 a share, valuing Endesa at €43.3bn.

Given the go ahead

The Spanish energy regulator gave its blessing in July, nearly two years after Gaz Natural’s abortive bid, and the final stock exchange approvals are expected by October.

“This deal transforms Enel from an Italian company into a southern European and South American company,” says Mr Perona. “It demonstrated our ability to execute complex cross-border situations and was proof of our senior management’s integrity. A German bank might not be the obvious choice as adviser to an Italian company bidding for a Spanish utility.”

Highly visible in the renewable energy business, Dresdner Kleinwort is also active in the water and waste sector – it advised Anglian Water’s board in the utility’s sale to Macquarie Bank.

Notable presence

The team’s remit also extends to natural resources, where it has a notable presence in Russia and eastern Europe. It was a global co-ordinator in the Rosneft initial public offering, then the largest out of Russia. “And we have led the advisory work on most large transactions undertaken by Gazprom,” says Carlos Gomez, a member of the natural resources team, primarily responsible for European oil and gas.

The team advised China’s Sinopec on its acquisition of Udmurtneft from TNK-BP, the largest single Chinese investment in Russia. And it advised ENI on its purchase of a strategic stake in the Czech Republic’s Unipetrol, the Italian company’s first major downstream acquisition in the region.

While high oil prices are prompting oil producers to seek out less economic reserves, production is also moving out into less politically stable regions. At the same time, national oil companies in emerging markets are taking a more active role in the development of their own resources, instead of taking the lead from western companies. Political decisions to empower these national champions have led to them flexing their muscles and making acquisitions in their own right. Here, Dresdner Kleinwort is enjoying the fruit of established relationships.

“We have had long relationships with companies like Gazprom, Malaysia’s Petronas, South Africa’s Sasol and Brazil’s Petrobras,” says team member Alexander Metherell.

Making history (l-r): Dresdner Kleinwort’s Vittorio Perona, Carlos Gomez, Alex Metherell and Simon Parker. Notable absentees are Anand Jagannathan, Jens Rosebrock are Thomas Scheibel.

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