The Riddle of the Mergers: Why Is Europe's Corporate Energy Landscape Changing?

Profound, even irresistible, driving forces are at work behind the high-profile, high-value mergers that are proposed between E.ON and Endesa, and between Suez and Gaz de France (GDF). The mergers offer a straightforward and simple means of achieving growth and diversity in a slow-growing market. The controversies that surround the merger proposals should not disguise the importance of these forces.

* Globalization in energy customers' product markets and the expansion of customer choice in gas and power supply throughout Europe mean that financial markets are expecting companies to look for values associated with size and scale.
* Size can lead to lower costs in gas and power supply. It allows for diversification of fuel risks in power generation and for building a portfolio of diverse sources of gas that increases supply security.
* However, there are risks, at a time of strong revenues in many energy companies, that the valuation of underlying assets is today at a relatively high point in the (usually cyclical) evolution of such value.
* Arguments about the merits of "national champions" and the "temptation of national independence" are almost a sideshow, perhaps being played out for electoral purposes or to play to domestic constituencies.

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