WILL SPAIN HAVE ITS ENERGY CHAMPION?

Size matters, as European utilities head toward further consolidation and gas-power integration. Sparking the recent merger-mania, Gas Natural's hostile takeover attempt of Endesa would create a Spanish energy champion and Europe's fifth largest utility. In a surprise response, E.ON made an all-cash bid for Endesa 30 percent above Gas Natural's offer. This drive toward consolidation comes just as the EU's Preliminary Report on competition has highlighted a high level of concentration and vertical integration in most markets. Further, divergent ideas about market structure between the European Union and some national energy policies may weaken the EU push to liberalization.

- The Endesa takeover battle, and any side deals, will shake up Spain's highly concentrated power market and rearrange players in Spain and in Europe, but is unlikely to create more competition or more opportunities for new entrants.
- The merger of Spain's gas monopoly with its top power utility would create a new European energy champion with the size and capability to compete Continent-wide, apparently a higher priority for the government than stimulating competition within Spain. The E.ON bid presents a dilemma, and a deal in this direction will involve government-to-government negotiations.
- Just when the European Commission seeks more competition, the merger would create an important precedent that puts national interests over the EU liberalization agenda. Yet creation of another energy champion and the battle for consolidation may represent a shift from national to Europe-wide competition.

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