German giant RWE has major cash reserves, but may be paying more than it should for acquisitions. Not only is the price it is ready to pay for its latest target Spanish utility Hidrocantabrico high, but an acquisition is also likely to be rather complicated. RWE may want to be more careful with its cash and consider a bid for Union Fenosa instead.
RWE has followed EDP of Portugal in bidding for Hidrocantabrico, which has 7% of the Spanish electricity market, in the hope of then acquiring a larger share of the market when Endesa and Iberdrola divest assets to allow their merger to go through. To win the battle for Hidrocantabrico, RWE is hoping to gain the support of the company's shareholders, such as Electrabel, Banco Santander and two families, which own 26% of the Spanish utility's equity.
The bid for Hidrocantabrico is expected to be at E25.2 per share, 25 times Hidrocantabrico's 1999 net income and more than double the share price before reports of a takeover bid were first revealed. It is also 5% more than the E24 per share bid from EdP and Spanish bank Caja Asturias. RWE can afford its bid, which works out at E2.8 billion, but it is felt to be expensive.
The intense competition from EDP/Caja Asturias and potentially also a still higher bid from Grupo Villar Mir, a Spanish industrialist with the support of Germany's EnBW, makes the battle likely to be messy. So far efforts to acquire Hidrocantabrico have been thwarted. TXU first made a bid which was beaten by Union Fenosa, but the Spanish government then vetoed this. Hidrocantabrico's board, meanwhile, rejected Grupo Villar Mir's first bid. In addition to this complexity, the acquisition would not just involve the upfront cost. RWE would be expected to spend more money on acquiring parts of Endesa and Iberdrola which are divested as part of the merger - in fact some E5 billion for these assets.
Given the high price and potentially messy acquisition process, RWE may want to look at the other significant player in the Spanish market, Union Fenosa. The company has about twice Hidrocantabrico's market share and is considered better value for money. However, many others will follow RWE if it makes a bid, so no acquisition will ever be easy in Spain.