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Today's IssueAlert Sponsors:=20
[IMAGE] The IBM e-Energy Executive Forum =01) "Personalization, Partnership, and=20 Profitability" Designed for executives in the utility industry looking to leverage Custome= r=20 Relationship Management in the competitive marketplace. Topics will focus o= n=20 how process and technology can be leveraged to gain competitive advantage.= =20 Featured speakers will include IT analysts, solution partners, IBM=20 executives, and customers including: John Goodman, President of e-Satisfy;= =20 Richard Grimes, Director of CRM Energy Services; David Bonnett, Global=20 e-Energy Sales Executive, Siebel Systems.=20 www.ibm.com=20 Miss last week? Catch up on the latest deregulation, competition and=20 restructuring developments in the energy industry with SCIENTECH's=20 IssuesWatch [IMAGE] The most comprehensive, up-to-date map of the North American Power System b= y=20 RDI/FT Energy is now available from SCIENTECH. =20 [IMAGE] IssueAlert for March 26, 2001=20 E.ON May Be Closing in on Purchase of Powergen by Will McNamara=20 Director, Electric Industry Analysis [News item from Reuters] German utility E.ON AG is near a deal to take a=20 stake in Britain's fourth largest power utility Powergen (NYSE: PWG) at a= =20 price 30 percent above current levels. According to the German paper=20 Handelsblatt, E.ON's supervisory board reportedly will make a final decisio= n=20 in the next week. Powergen, meanwhile, said it is still in talks on a=20 possible offer from another company. "There can be no assurance that these= =20 discussions will result in an offer being made for the company," Powergen= =20 said in a statement. The company first announced that it was in talks to be= =20 purchased on Jan. 16.=20 Analysis: The word that E.ON, Europe's second largest power company, would= =20 buy a stake in Powergen at a fat 30-percent premium of around 6.90 pounds= =20 increased Powergen's British stock price by as much as 7 percent to reach 7= 39=20 pence. A combination of the two companies would create a power firm on par= =20 with Europe's largest power companies, France's EDF and Italy's Enel. Since= =20 talks about a potential acquisition by E.ON surfaced in January, Powergen's= =20 stock price has climbed 21 percent. In addition, according to Reuters,=20 Powergen jumped to the top of the gainers list for the United Kingdom's FTS= E=20 100 blue chip index. On March 22, Powergen stock reached 739 pence, while t= he=20 FTSE 1000 index was down 2.5 percent at 27-month lows. Powergen also trades= =20 in the United States on the New York Stock Exchange, where Powergen shares= =20 opened March 26 at $42.00.=20 If the rumors about Powergen's price tag are true, E.ON would end up paying= =20 more than nine pounds a share or six billion pounds (U.S. $8.5 billion) for= =20 the U.K.-based Powergen, which carries a debt of about 5.2 billion pounds.= =20 These projections exceed previous reports from financial analysts who=20 suggested that E.ON would pay no more than eight pounds a share for Powerge= n.=20 E.ON might be feeling increased pressure to finalize a deal with Powergen= =20 since other players such as Scottish Power have also expressed interest in= =20 the company. With significant capital to spend (Reuters reported up to $50= =20 billion including proposed divestitures), E.ON reportedly believes that=20 Britain, where demand is outpacing the rest of Europe, is the best country = in=20 which to begin a rapid expansion strategy. Despite the fact that Powergen h= ad=20 previously acknowledged that it was working on a deal with E.ON, over the= =20 last week it has maintained that discussions continue with other companies.= =20 E.ON, formed as a result of last year's merger between Veba and Viag,=20 supplies Germany and Europe with electricity, heating, natural gas, water a= nd=20 petroleum. Germany, which opened 100 percent of its energy market all at on= ce=20 in April 1998, has undergone a period of rapid consolidation. As a result,= =20 the largest power companies in the country have begun seeking competitive= =20 opportunities across the Continent (this is a growing trend in Europe as=20 companies from other countries are following the same competitive strategy)= .=20 E.ON must expand outside of its home country, where analysts have speculate= d=20 that core profits in its generation business have become unstable. In many= =20 ways, consolidation is a means of survival for E.ON, as Europe continues to= =20 liberalize and electricity prices fall as a result. =20 Powergen=01*which generates about 14 percent of the electricity used in Eng= land=20 and Wales and has electric and gas operations throughout Europe, India, Asi= a=20 and Australia=01*is a company that became known for its global expansion=20 efforts, especially in the United States. Just last December, Powergen=20 completed a $3.2 billion acquisition of Louisville, Ky.-based LGOEnergy Cor= p.=20 Powergen had wanted for some time to penetrate the U.S. market, as a result= =20 of consolidation that had taken place in the United Kingdom. The acquisitio= n=20 of LGObecame appealing to Powergen because of the U.K. company's desire to= =20 establish a strong presence in the Midwest market. Altogether, LG&E's two= =20 utilities and numerous unregulated businesses total about $5 billion in=20 assets, which was thought to support any further expansion that Powergen=20 might have had in mind. =20 Powergen has a market capitalization of $6.66 billion and P/E ratio of 11.0= 2=20 (according to Yahoo Finance). However, the company has struggled over the= =20 last year. Powergen's primary subsidiary, LGOEnergy, saw its profit for 200= 0=20 decline by 4 percent to $497 million from $518 million. As the parent=20 company, Powergen saw its profits decline by 12 percent in 2000, to $518=20 million from $590 million, although its revenue increased 11 percent to $6= =20 billion, up from $5.4 billion in 1999. Keep in mind that Powergen's=20 acquisition of LGOwas not completed until December 2000, so LG&E's earnings= =20 will be reflected fully in its parent's financial report starting this year= . =20 If E.ON were to acquire Powergen, it would gain several strategic advantage= s.=20 E.ON would no longer be reliant solely on the German market, where falling= =20 prices and continued consolidation limit competitive opportunities. In=20 addition, the purchase would give E.ON a hold on generating assets in the= =20 United Kingdom, and the comparatively low-cost power production, 3.7 millio= n=20 customers and various business operations that LGOoffers in the United=20 States. =20 As noted, Powergen has acknowledged that it has received approaches from E.= ON=20 and other companies. Based on available reports, those "other companies" ar= e=20 most likely RWE (Germany's largest power supplier and a rival of E.ON),=20 Vivendi and Suez Lyonnaise (French mega-utilities) and an unnamed American= =20 power company (Enron or Southern Energy would be my best guess). However,= =20 word from its management team is that Powergen is not interested in getting= =20 tied up (as a purchased entity) in merger or acquisition proceedings at thi= s=20 time as it may be planning additional purchases of its own in the United=20 States. =20 On the other hand, the rationale for Powergen to be sold to a company like= =20 E.ON is taking shape. British restructuring law has forced large generators= =20 to sell power stations to reduce any likelihood of market power. As a resul= t,=20 Powergen has morphed from a pure U.K. generating company to a broad-based= =20 company engaged in telecommunications, gas, and distribution services. Ed= =20 Wallis, Powergen's CEO, has stated that presently it has become very=20 difficult for Powergen to compete with larger rivals in an enlarged Europea= n=20 market. As noted, Powergen's strategy over the last year has been one of=20 further expansion in the United States, and the purchase of LGOwas perhaps= =20 more expensive than Powergen had planned. In order to make further U.S.=20 acquisitions, Powergen needs adequate capital or equity in order to finance= =20 the acquisition, something that has become more difficult since its purchas= e=20 of LG&E. =20 Nevertheless, if the deal takes place it will require regulatory approval i= n=20 the United States from FERC, the SEC and the Kentucky Public Service=20 Commission (among other possible agencies). The climate for U.S. energy=20 industry mergers and acquisitions has become rather turbulent in recent=20 weeks. Three high-profile mergers (Entergy / FPL Group, Con Edison /=20 Northeast Utilities and Sierra Pacific Resources / Portland General) have a= ll=20 encountered difficulties that could derail their pending deals. In addition= ,=20 according to a recent report in the Wall Street Journal, announced worldwid= e=20 mergers and acquisitions this year totaled $390.4 billion (as of March 21),= =20 which is about one-third of the volume during the same period last year.=20 Also, about 164 merger deals have been withdrawn from the market, compared= =20 with 153 deals that were withdrawn for the same period last year, according= =20 to the WSJ report. =20 Analysts that have been closely watching the potential for an E.ON / Powerg= en=20 deal say that Powergen's U.S. operations in LGOcould prove to be a major=20 stumbling block for the two companies, and that E.ON may find U.S. regulato= ry=20 requirements to be much more stringent than those in Europe. Specifically,= =20 the SEC has strict rules regarding what kinds of companies can own public= =20 utilities (a category into which LGOfalls) and E.ON's diverse, non-power=20 operations may send some red flags to American regulators. Consequently,= =20 although E.ON appears rather confident that this deal will be completed=20 rather soon, Powergen's reported resistance and U.S. regulatory obstacles m= ay=20 thwart this yet-to-be-formally-announced partnership. =20 An archive list of previous IssueAlerts is available at www.ConsultRCI.com Reach thousands of utility analysts and decision makers every day. Your=20 company can schedule a sponsorship of IssueAlert by contacting Nancy Spring= =20 via e-mail or calling (505)244-7613. Advertising opportunities are also=20 available on our website.=20 SCIENTECH is pleased to provide you with your free, daily IssueAlert. Let = us=20 know if we can help you with in-depth analyses or any other SCIENTECH=20 information products. If you would like to refer a colleague to receive ou= r=20 free, daily IssueAlerts, please reply to this email and include their ful= l=20 name and email address or register directly on our site. =20 If you no longer wish to receive this daily email, send a message to=20 IssueAlert, and include the word "delete" in the subject line.=20 SCIENTECH's IssueAlerts(SM) are compiled based on the independent analysis= =20 of SCIENTECH consultants. The opinions expressed in SCIENTECH's IssueAlert= s=20 are not intended to predict financial performance of companies discussed, = or=20 to be the basis for investment decisions of any kind. SCIENTECH's sole=20 purpose in publishing its IssueAlerts is to offer an independent perspecti= ve=20 regarding the key events occurring in the energy industry, based on its=20 long-standing reputation as an expert on energy issues. =20 Copyright 2001. SCIENTECH, Inc. All rights reserved.
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