Tuesday, September 4, 2007

French lessons for UK's energy market

Nils Pratley (The Guardian)

French presidents come and go, but old-style state capitalism remains a fixture in Paris. Nicolas Sarkozy's personal intervention seems to have been the critical factor in forcing through the merger of Suez and state-controlled Gaz de France.

Suez chairman Gerard Mestrallet was protesting as late as last week that his company couldn't live without its water and waste division. Sarkozy disagreed, and Sarkozy prevailed.

In slightly shrunken form, Suez is just the right size for a merger with GDF, meaning it is just the right size for the French state's shareholding in the new €70bn (£47bn) entity to emerge at 35-40%.

Nominally, GDF is being privatised and a liberalising agenda is being pursued. In reality, the French state is gaining effective control of GDF-Suez, which will be the world's third-largest listed power company. It's a triumph for French nationalism and a defeat for the European commission, which would prefer energy markets in Europe to be freer and less dominated by corporate titans.

Sarkozy and the commission are on a collision course, but the French president will not be trembling. He is swimming with the tide in implying that free markets in energy don't work. This is an age when Russia, and specifically Gazprom, loom. Security of supply, not ensuring a good deal for consumers, is the worry in most European capitals and bigger is deemed to be safer. Sarkozy is doing what others would love to copy in creating a second national champion to operate alongside EDF, the electricity group.

The odd man out, of course, is Britain, which has long been in the commission's camp on liberalisation. Our regulators can produce a zillion statistics on how free competition has benefited UK consumers, but it's also a fact that our would-be corporate champions are lower-league players on the European stage. National Grid is obliged to shop in the US; Centrica has managed to acquire only unconnected bits and pieces on the continent.

In fact, the Suez-GDF deal illustrates very well how different leagues operate. As a condition of the deal, GDF has to sell its 25.5% stake in SPE, Belgium's second largest integrated energy business, because Suez owns the number one player. Centrica, which has 25.5% of SPE already, has the right to buy out GDF, so control should follow easily. But the value of SPE? About £515m, at the last count in 2005 - mere crumbs.

Political shenanigans in the French energy market may seem like a distant world when viewed from Britain. For most of the past decade, when North Sea oil and gas revenues were strong, that's been a fair stance. Now that imported energy is a greater part of the UK mix, we will see the other side of liberal markets. The balance sheets of companies in France, Germany and Spain will be needed to fund the next generation of energy investment in Britain.

Korean credentials

A fortnight ago, HSBC was said to be planning to pay $5bn-$5.5bn (£2.5bn) for 51% of Korea Exchange Bank (KEB). When the terms actually emerged yesterday, the price had risen to $6.3bn. What has happened in the interim?

Maybe only HSBC's greater desire to seal the deal. The bank has been eyeing South Korea, Asia's third largest economy, for eight years, and has been thwarted twice, most painfully when Standard Chartered snatched Korea First Bank two years ago. It doesn't want counter-bidders for KEB to emerge now.

HSBC could claim the price for control of KEB - about 1.8 times book value - is in line with other banking takeovers in Korea, but in this case the seller would seem to be desperate for any clean exit.

Lone Star, a US private equity outfit, has already seen two potential sales collapse because of an ongoing investigation into the legality of its original takeover of KEB in 2003. The key question is whether HSBC has a better chance than the others of persuading the Korean government to drop its demand that legal disputes must be settled before any takeover can happen.

HSBC's strategy seems to be to put its reputation as a top-notch international institution on the line and dare the Koreans to say no. "We believe we have the credentials to put ourselves in a very favourable light," said finance director Douglas Flint.

To concentrate minds, HSBC has set a deadline: if the deal is not done by the end of next April, it's off.

It's ballsy stuff, but HSBC shareholders will not be complaining. Almost any deal in Asia, even an expensive-looking one with a legal wrangle, will be welcomed after the bank's adventure into the US sub-prime market with Household in 2002. Market-savvy Korean politicians look a better bet than American junk borrowers.

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