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EdF’s march across Europe continues at a price

Electricité de France (EdF), the state-owned power giant, has added another major acquisition to its portfolio, once again outside its home nation. American Electric Power (AEP), the Columbus, Ohio-based diversified energy firm, agreed on June 18 to sell UK utility Seeboard to EdF at a price some observers feel is very high.

The deal, in which EdF will pay £670 million ($943 million) for Seeboard’s assets, is dependent on European Union approval and is expected to be completed by the end of July. EdF will also assume debts and liabilities of £822 million from AEP, bringing the total cost of the deal to nearly £1.5 billion.

AEP has for some months been looking to sell its main UK holding – which it formally acquired in June 2000 as part of its 1997 takeover of Central & South West Corp – as the post-Enron market forces US energy firms to rethink their strategies and strengthen their balance sheets.

The company has also expressed an interest in leaving the electricity distribution and household supply business. In April 2001, AEP sold its 50% shareholding in Yorkshire Electricity.

The new 1.9 million domestic energy customers that come with the Seeboard buyout make EdF one of the biggest energy players in the UK market. The French major now has around 5 million customers in Britain, a large proportion of which come from its largest UK holding, London Electricity. The 5-million-customer mark is widely accepted by the UK energy industry as the minimum number for business safety.

Fiercely contested
The auction for Seeboard was fiercely contested by four major power players: EdF, Germany’s E.on, the UK’s Scottish & Southern Energy and Dallas-based TXU Corp.

At £309 per customer, the Seeboard acquisition is the most expensive yet for a UK supply business. Neil Massie, a fund manager at LeggMason Investors in London, feels EdF is paying too much, especially if comparisons are drawn to previous sales.

“It’s quite a sum when you consider what price other businesses have been sold for,” he says. The customers of certain other regional power suppliers have been acquired for far less, with those of Sweb and Swalec going for £181 each and £126 each respectively.

But Massie feels EdF has a good reason for paying so much. “It’s a bid to achieve critical mass, and it certainly puts EdF into the upper league of UK suppliers,” he says. “From this position they will be able to cross-sell other products into the market.”

The view that Seeboard’s price was very high has been echoed by TXU. While neither confirming or denying the firm’s involvement in the auction, a spokesman for the company says TXU has a policy of not overpaying for any acquisition.

EdF’s European strategy has irked some in the sector, who feel France should make more of an effort to open its own markets before entering so many other countries. But LeggMason’s Massie feels this might take some time. “France continues to say it is going down the deregulation route – and there is limited competition – but few players are in there,” he says. “While there is talk of privatising EdF, it’s an extremely slow process.”

A spokesman for EdF says: “Seeboard is our last large acquisition in the UK for some time, perhaps for good. I understand that people are sometimes negative about EdF’s growing role in Europe, but nothing we do is illegal. We are simply getting a better market position.”

Indeed, LeggMason’s Massie says that to bar one country from entering a market because its own market is not as liberalised as it could be is no solution.

However, the Italian government disagrees with this view. EdF owns 18% of Italenergia, the parent company of Italy’s second biggest power firm, Edison, based in Milan. But the government has kept the French company’s voting rights in Italenergia down to 2% and announced on June 12 that it did not foresee any change in that figure, primarily due to the lack of liberalisation in the French market.

EdF’s international expansion comes at a time of price pressure on its home front. According to news agency Reuters, in mid-June the company asked the French government’s permission to raise domestic electricity rates by 5%. The company is keen to bolster resources to ease its obliged purchase of power from renewable sources. A 5% increase would add around €1 billion to EdF’s annual revenues.

The last increase in household prices came in November, when EdF raised prices by 1%. A request by chairman François Roussely to increase prices by another 5% was turned down by the government at the end of 2001.

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