Vattenfall, the Nordic region’s largest utility, has retained financial advisers to carry out a broad strategic review of potential acquisitions in the UK energy market.

NM Rothschild and McKinsey, the consultancy, have been asked to review several targets in the UK – including Centrica, Scottish & Southern, Scottish Power and United Utilities – all of which have been subject to takeover speculation since the beginning of the year. Vattenfall, which is owned by the Swedish government and is based in Stockholm, has not yet approached any of these companies.

The Swedish company’s interest in the UK comes at a time when European utilities are seeking to gain new customers ahead of a European Union 2007 deadline for national borders to energy competition to fall.

Earlier this year, Electricité de France teamed up with AEM to buy Italy’s Edison; Suez agreed to buy the shares it did not already own in Belgium’s Electrabel; and Endesa, the Spanish utility, launched a hostile bid for rival Gas Natural.

However, last month, Eon of Germany walked away from takeover talks with Scottish Power after the UK group rejected a bid of £1.3bn, leaving the door open for rival offers.

Centrica, which owns British Gas, has also been vulnerable to a takeover bid as the lack of a liquid, Europe-wide market in gas and electricity made it difficult to secure gas for its customers at a reasonable price.

Industry observers say rising profits because of record gas and power prices, declining debts and a desire to supply both electricity and natural gas will trigger more mergers and acquisitions.

In October, Standard & Poor’s, the credit rating agency, noted that relatively stable conditions in the European utility sector – with higher power prices and better cost containment – throughout 2003 and 2004 had led to many utilities increasing free operating cash flow.

S&P said many of the larger utilities, such as Eon, Enel of Italy and Vattenfall, had built “cash piles” and could “adopt an expansionary high-risk, high-growth strategy to increase returns” as there was restricted scope for many European utilities to improve shareholder returns through organic growth.

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