FOREIGN TAKEOVERS OF DUTCH ENERGY COMPANIES

UNCLAS SECTION 01 OF 03 THE HAGUE 000132 SIPDIS STATE PASS FEDERAL RESERVE BOARD - INTERNATIONAL DIVISION, TREASURY FOR IMI/OASIA.VATUKORALA, USDOC FOR 4212/USFCS/MAC/EURA/OWE/DCALVERT E.O. 12958: N/A TAGS: ECON EFIN PGOV PREL NL SUBJECT: FOREIGN TAKEOVERS OF DUTCH ENERGY COMPANIES Ref: 08 THE HAGUE 246 THE HAGUE 00000132 001.2 OF 003 ¶1. SUMMARY: Following the Essent takeover by Germany's RWE on January 22, Nuon announced February 23 that it had agreed to a takeover bid by Sweden's Vattenfall. Two other large Dutch energy companies have been linked in the media to takeover discussions. In addition to competition issues, Essent's takeover has raised concerns about foreign ownership of a nuclear plant, RWE's environmentally unfriendly image, and energy security in the Netherlands. End summary. -------------- DUTCH UNBUNDLING LEGISLATION -------------- ¶2. The Dutch unbundling law that became effective July 1, 2008, forces the public gas and power companies to divest their network holdings by January 1, 2011. This will create two types of energy companies: regulated network companies applying users' fees set by the central government (the DTE, or Office of Energy Regulation), and distribution companies dealing with trade, supply, and production. The law, which energy companies strongly opposed, aims to increase network efficiency and reliability and cut costs, primarily to industrial and business customers (reftel). Some smaller energy companies already comply with the law, but the four largest companies are still in the process of unbundling their activities. As the networks form a significant part of energy companies' assets and income, divesting them makes Dutch companies financially weaker and therefore easier targets for takeovers by foreign energy companies - especially if those firms (like RWE) have not yet unbundled themselves. Dutch companies also assert that, as smaller entities, they need to merge with others for economies of scale, as only large companies can secure favorable terms in strongly fluctuating fuel markets. -------------- TAKEOVER OF ESSENT -------------- ¶3. The current owners of Arnhem-based energy company Essent are five Dutch provincial authorities that hold 74 percent of Essent's shares, while the remaining 26 percent are owned by multiple Dutch municipalities. Essent, which has over 2.6 million private and business consumers in the Netherlands and approximately 7800 employees, provides its customers gas, electricity, and waste management services. The company had revenues of 6.6 billion euro in 2008. Its announcement on January 22 that it had accepted a 9.3 billion euro all-cash takeover bid by German RWE came as little surprise, as Essent had been in discussions with other takeover candidates including Sweden's Vattenfall, Denmark's Dong, and Italy's Eni for several months. RWE's bid is for all Essent's shares, excluding the waste management operations and network which must remain public property. If 80 percent of the shareholders, as well as European competition authorities, approve the deal, it will make RWE the fourth largest energy company in Europe. According to Essent, the deal will ensure the company's "long-stated ambition to play a leading role in consolidating the North-West European energy market." Essent CEO Michiel Boersma also stressed that economies of scale are essential for energy companies. Since Essent's previous merger discussions with Nuon had failed, Essent had to look outside Dutch borders for a large international partner. ¶4. Essent's takeover faces two major complications. One is that Q4. Essent's takeover faces two major complications. One is that Essent owns 50 percent of the association that manages the Netherlands' only nuclear plant in Borssele; energy company Delta owns the other 50 percent. According to the nuclear plant's Articles of Association, it must remain public property. Although Delta has publicly offered to buy Essent's 50 percent stake, RWE wants the nuclear plant included in its takeover of Essent. RWE CEO Jurgen Grossman stated February 14 that he is very optimistic about RWE's bid to become a co-owner of the Borssele plant, and that RWE is seeking to invest in new nuclear plants in the Netherlands if and when the opportunity arises. ¶5. The second complicating factor is RWE's poor environmental record, which does not mesh with Essent's goal of increasing sustainable energy production. The World Wildlife Fund recently ended its partnership with Essent in protest over the proposed sale. Essent's CEO explained that Essent had to consider several factors in the deal, including RWE's track record on environmental issues, management, and fiscal performance, as well as EU competition rules. Boersma noted that the deciding factor in RWE's favor was the security of RWE's financing. RWE has committed to investing between 4 and 5 billion euro in Essent after the takeover and has stated that it is planning to significantly decrease its CO2-emissions. THE HAGUE 00000132 002.2 OF 003 Essent would keep its name for the time being, although two of its four board members would be appointed by RWE. Despite the two obstacles noted above, Essent shareholders and EU competition authorities are widely expected to approve the deal, and RWE expects to conclude the takeover in the third quarter of 2009. -------------- TAKEOVER OF NUON -------------- ¶6. Nuon announced February 23 that it had agreed to an all-cash offer of 8.5 billion euro by Sweden's Vattenfall for Nuon's production and supply company, leaving Nuon's network company Alliander outside the deal. Owned by provincial Dutch authorities and municipalities, Nuon is a gas and electricity provider with 10,000 employees and 3 million customers. It recorded a net profit in 2008 of 765 million euro - down 13 percent from its 2007 profits. Vattenfall, 100 percent-owned by the Swedish government, initially will acquire 49 percent of Nuon's shares, with fixed terms in place to acquire the remaining shares over the coming six years. Nuon and Essent had been in takeover discussions with several of the same firms, including Denmark's Dong and Italy's Eni. Nuon CEO Oystein Loseth asserted that "Vattenfall is a strong force in combating climate change. Our partnership will boost Nuon's investment program for new, cleaner production and innovative energy technologies for our customers." ¶7. Earlier in February, the Province of North Holland, which owns 9 percent of Nuon's shares, expressed opposition the sale, citing fears that foreign management would always place commercial interests above larger production and supply demands. The province called on the national Dutch government to purchase 15 percent of Nuon's shares to sink the deal, but the national government has refused to intervene. North Holland now appears resigned to the takeover and reportedly has agreed to sell its shares to Vattenfall. "If [the sale] must happen, then Vattenfall is not a bad party," quipped a provincial representative. Meanwhile, the Province of Gelderland, which owns the largest share of Nuon (44 percent),is enthusiastic about the deal. Pending approval by Nuon's shareholders, the transaction is expected to close by the end of the second quarter of 2009. ¶8. The two other large Dutch energy companies, Delta and Eneco, have not announced any takeover plans, although Germany's E.ON is rumored to be interested in Eneco. -------------- GOVERNMENT NOT PLEASED WITH DEVELOPMENTS -------------- ¶9. Economic Affairs Minister Maria van der Hoeven (responsible for Dutch energy policy) is not pleased with the idea of allowing foreign takeovers by companies like RWE that have not yet unbundled their own networks from production activities. Vattenfall, on the other hand, has already unbundled. Van der Hoeven plans to "express her concerns" about RWE's deal with Essent to the European Commission, which must still approve the takeover. She also expressed regret that the EU's unbundling legislation has not yet been implemented by all Member States, including Germany and Italy, and that due to this lack of implementation she has no legal means by which to prevent the Essent takeover. Van der Hoeven denied, however, that the Dutch energy market is in any danger of destabilization from foreign takeovers. She pointed out that Qdestabilization from foreign takeovers. She pointed out that currently "there are 15 energy suppliers active in the Netherlands," and "40 percent of electricity already comes from plants owned by foreign entities." ¶10. Several Dutch parliamentarians (MPs) had objected to the implementation of Dutch unbundling legislation in 2008, primarily on the grounds that Dutch energy companies would become takeover targets. Labor Party MP Diederik Samsom called the Essent takeover "hasty and unwise," pointing to RWE's poor environmental record and lack of unbundling. He had fewer reservations about Nuon's takeover, however, as the process will be more gradual. Importantly, Vattenfall also has a better environmental record and has already unbundled its activities. The largest Dutch opposition party, the Socialist Party, strongly opposes the foreign takeover of energy companies in general, arguing that these companies "fill an important task in society and should not be privatized." According to Socialist MP Paul Janssen, "commercial parties are only interested in making a profit and are less keen on sustainable energy production." He conceded, however, that purchasing alliances could help produce economies of scale. -------------- COMMENT THE HAGUE 00000132 003.2 OF 003 -------------- ¶11. Comment: It is highly unlikely that the current trend of foreign takeovers of Dutch energy companies will change national or European unbundling legislation. Essent and Nuon's takeovers came as little surprise, given that they had been in discussions with foreign suitors even before the implementation of the Netherlands' unbundling law on July 1, 2008. Despite rhetoric from some politicians to the contrary, foreign ownership of Dutch energy companies will not undermine national energy security. Almost half of the country's electricity already comes from foreign-owned plants, and by law the Dutch energy networks remain public property. Foreign ownership does have one drawback, however, in that it limits the influence of provincial and municipal governments - often the major shareholders in Dutch energy companies - on decisions about sustainable energy production. End comment. GALLAGHER