By Gregory Viscusi
Sept. 25 (Bloomberg) -- France extended its dominance of power markets in Europe with Electricite de France SA's purchase yesterday of Britain's largest electricity producer. Yet the energy company remains off bounds for foreigners.
The last time an outsider tried to buy a French power company -- when Rome-based Enel SpA said in 2006 it wanted to bid for Suez SA -- the government orchestrated Suez's merger with state-owned Gaz de France SA, which was completed in July and valued the combined companies at 93.3 billion euros ($137.5 billion).
``There's clearly asymmetry at work here,'' said Juan Delgado, a fellow at Bruegel, a Brussels-based research institute. ``There's no distinction between the government and EDF, and in this case the French government is able to promote an industrial policy while preventing its own companies from ever being bought.''
For all its market reach, state-controlled EDF has fallen 36 percent this year in Paris trading, more than rivals in Italy, Spain and Germany. The Paris-based company's 12.5 billion-pound ($23 billion) purchase of British Energy Group Plc comes as the European Union pushes for the opening of electricity markets to competition, boosting opportunities for investors.
The EU hasn't demanded that governments sell their controlling stakes in former monopolies, which may lead to even greater control of the market by countries like France, said Katinka Barysch, a researcher at the Centre for European Reform in London.
National Champions
``The Germans and French have always insisted that there is a need for national champions, and faced with concern about energy supplies and the rise of big Russian energy groups, they are winning the argument,'' she said.
EDF is the fifth-worst performing in the Dow Jones Europe STOXX Utilities Index, which is down 26 percent this year. While all but four of the members have declined this year, most have fallen less, including Bilbao, Spain-based Iberdrola SA down 31 percent, Enel 27 percent and Madrid-based Endesa SA 26 percent. Top gainers are East Kilbride-based British Energy Group Plc, up 39 percent, and Selby-based Drax Group Plc, up 31 percent.
Paris-based EDF, the world's largest operator of nuclear reactors, agreed to pay 774 pence a share for the U.K.'s biggest power producer, 35 percent above British Energy's closing price on March 14, when the East Kilbride, Scotland- based utility said it may receive an offer. The deal, announced yesterday, gives EDF control of eight British nuclear sites.
`Level Playing Field'
``Is the British government or any one else asking whether the playing field should be level before such a transaction is permitted?'' said Craig Forbes, first vice president for investments at the Forbes-Washburn Group in Richmond, Virginia. ``If British Nuclear wanted to buy EDF, would France allow it? I know that the answer from France would be no, but is anyone in England or Europe asking this question?''
EDF, which is owned 85 percent by the French government, has 45 percent of Energie Baden-Wuerttemberg AG, Germany's third-largest energy company, and controls Edison SpA in Italy, the second-largest utility in that country, jointly with A2A Spa. EDF also has stakes in energy producers in Poland, Hungary, and Slovakia.
GDF Suez, whose single biggest shareholder is the French government, owns Electrabel SA, which is Belgium's biggest power producer and owner of seven nuclear reactors.
New Reactors
EDF's record gave it an edge when the U.K. government was seeking a partner for British Energy.
``The British government once felt the market could solve everything, but with the renewal of interest in nuclear power, it realizes that in such a capital-intensive industry you need groups with real muscle,'' said Barysch. ``That's why there's been no outrage here.''
Last year, 77 percent of France's electricity came from nuclear power plants. British Energy plans to build four reactors.
France's government and its unions have welcomed EDF's forays. The Confederation Francaise Democratique du Travail last week said it backs the French utility's strategy to focus on Europe and become a leader in the development of nuclear energy, while saying it's paying too much.
``It's an important step in the international development of EDF, which extends its status as the world's leader in nuclear energy,'' French Prime Minister Francois Fillon said.
Cross-Border Deals
France isn't the only country to block foreign groups from entering its energy market. Other countries have, however, eventually given in.
The Italian government initially opposed EDF's attempts to take control of Edison in 2001 on the grounds that EDF was state-owned. In 2005 EDF made its move on Edison, along with Italian partner Aem SpA, now called A2A. EDF's voting rights were at first limited to 2 percent, before Italy in 2006 scrapped the restrictions under EU pressure.
E.ON AG, Germany's largest utility, in April 2007 dropped its offer for Endesa SA, Spain's largest utility, after opposition from the Spanish government. Spain's Acciona SA and Italy's Enel SpA were later allowed to take over Endesa and let E.ON buy some of Endesa's assets.
French President Nicolas Sarkozy said in July it is France's ``role'' to help countries who want civil nuclear energy. France began promoting domestic nuclear power in the 1970s when it was still mostly relying on fossil fuels. It is now betting on the European Pressurized Reactor, or EPR, to increase nuclear exports.
Leveraging Power
``This is yet another example of the French government leveraging its nuclear power,'' Charles D. Ferguson, senior fellow in Washington at the Council on Foreign Relations, said in a telephone interview.
A lack of skilled labor and rising construction costs may be barriers for French expansion beyond the U.K, he added. Areva SA's plan to build the world's most powerful reactor reactor in Finland is more than 25 percent over its $3 billion-euro ($4.4 billion) budget.
``Many practical difficulties stand between France and its ambitious goals,'' Ferguson said.
For Related News: Stories on U.K. power market: {TNI UK PWRMARKET } British Energy earnings: {BGY LN TCNI Equity ERN } Today's announced deals: {MNSA }
To contact the reporter on this story: Gregory Viscusi in Paris at gviscusi@bloomberg.net.
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