Mature Response to Natural Keenness: LEX COLUMN - Endesa/Gas Natural

The following is an article from the Lex Column issued
yesterday in the Financial Times, European Edition (page 16).
   Endesa (NYSE: ELE) has taken a magisterial 27 days to defend
itself from a hostile Euros 22.5bn bid from Gas Natural, its smaller
rival. The content and the timing of its response are mature. It has
not whinged about political interference. Catalonia's political
establishment, backing Gas Natural, may want to play God. Endesa's
owners, 45 per cent foreigners, adhere to the gospel of price.
   Endesa has some strong arguments. The premium to the undisturbed
price is a low 15 per cent. Gas Natural shareholder Repsol would own
13 per cent of the combined entity. It recently said it would sell
down, creating an overhang. La Caixa, an unquoted Catalan bank with a
political mandate, would have 15 per cent. Critically, the low Euros
7.8bn cash component would be financed by selling Euros 7bn-Euros 9bn
of Endesa assets, mainly to rival Iberdrola. Since the price for this
is unknown, it is impossible to evaluate the true worth of the offer.
   Strategically, it is unclear what the benefit of integrating gas
distribution and Endesa's power business is, beyond a simple
diversification effect. Adding Gas Natural's Euros 14bn enterprise
value to Endesa's Euros 48bn EV should create synergies. However,
logically, selling Euros 7bn-Euros 9bn of Endesa assets should have
the opposite effect.
   Endesa has committed itself to return Euros 7bn in cash over five
years and raised its long-term guidance to hysterical levels. But its
main weapon is that the offer is not convincing. Gas Natural is keen,
but in a hostile, share-financed reverse takeover, enthusiasm is not
enough.