Midlands deal will strengthen Powergen says Datamonitor

23 October 2003 – Powergen’s likely acquisition of Midlands gives the company, and its German parent E.ON, the opportunity to expand its customer base and reinforce its position as a vertically integrated energy provider with a dominant position in the UK market, says market analysts Datamonitor

Powergen’s bid for Midlands Electricity comes soon after the withdrawal of Scottish and Southern Energy’s (SSE) £1.1bn offer for the company, and some seven years after Powergen’s first attempt to buy it. The offer will buy out the bondholders with a 95.8 per cent nominal value cash offering and provide the US owners, Aquila and FirstEnergy, with a payment of €51m. The final purchase price amounts to €1.637bn (£1.146bn).

Parent company E.ON would assume €692m in debt and forecasted restructuring costs of (£43m, but the company stated that the acquisition would be “significantly earnings enhancing”.

E.ON chief executive Wulf Bernotat stated that the acquisition would “considerably strengthen” E.ON’s position in its core UK operating sphere.

The market reacted favourably to the announcement; E.ON’s shares rose 2.4 per cent to €43.20 at the start of trading on October 21. The acquisition of Midlands’ 2.4m distribution customers should enable significant synergies within the two bordering Public Electricity Supplier (PES) regions, where the company expects to deliver savings of at least £50m by the second year.

The Midlands deal is proof that E.ON is pressing ahead with an ambitious

European expansion program, to which it has already allocated €10bn (£7bn). Any forthcoming sale of National Grid Transco’s Local Distribution Zones or regional gas networks could see Powergen acquiring again as it seeks to focus on the asset management field.

Powergen expects the deal to go through in early 2004, although it has yet to gain approval from the EU, bondholders and the Kansas State Commission in the US.

At the time of electricity deregulation, Powergen was seen primarily as a power generator but Datamonitor believes that a shift to a broader base has allowed it to assume a dominant position across the electricity value chain in the UK. Its competitors will be hard pressed to dent its leading market position.