Iberdrola/Scottish Power

Iberdrola’s offer for Scottish Power is evidence that the butterfly effect exists. In this instance, a builder flexes its muscles in Spain and a utility based in Glasgow ends up getting taken over. Spain’s construction groups have emerged as power brokers in the domestic utilities sector. One of them, ACS, has built a 10 per cent stake in Iberdrola and is said to want to merge it with Union Fenosa, another Spanish utility in which ACS holds a 40.5 per cent stake. Besides creating an obstacle to this, why does Iberdrola want to buy Scottish Power? Strategically, it provides scale and diversification away from Spain and Scottish Power also owns PPM, a US wind power developer. PPM, however, represents only about 20-25 per cent of Scottish Power’s sum-of-the-parts value. It is not clear that it is a must-own for Iberdrola, which is already the world’s largest wind power generator. In terms of scale, the new entity will be big in absolute terms but will essentially marry a large player in Spain’s fast-growing energy market with a relatively small competitor in the UK’s mature market. The twin pillars of the deal – renewables and European energy integration – are both subject to political risks.

The announced synergies, including the benefits of Spanish tax breaks on goodwill, are worth perhaps 100p per Scottish Power share. Net that off the 777p price implied by the cash and stock offer, and Iberdrola is still paying a punchy multiple of 9.3 times current earnings before interest, tax, depreciation and amortisation. That, the “strategic” rationale and the backdrop of turmoil in Spain’s utilities sector are all reasons to be wary of this deal. Meanwhile, Iberdrola’s use of its own highly rated paper to cover almost half the cost – while an astute tactic – adds to the sense that valuations in Europe’s utilities sector are near a peak.