HAVE we seen the death of the idea that a critical factor in the success of the Scottish economy is to have Scottish corporate champions? To a large extent, I think we have, and that's no bad thing. But to the follow-on question, which is whether we are fully signed up to what fundamentally matters for economic success, I fear the answer is not yet.
These thoughts were prompted from listening this week to Ignacio Gálán, chairman of Iberdrola, the Spanish owners of ScottishPower, and by some reflections on the present state of the Scottish electricity generating industry.
On a casual reading o
f this or any other newspaper, it is in uproar. Hardly had we got used to the idea of ScottishPower being in Spanish hands than it seems that Iberdrola itself might get bought by a bigger rival. British Energy, the Scottish headquartered firm that nobody likes to talk about because it generates nuclear electricity, is definitely for sale. Takeover rumours persistently swirl up round Scottish &Southern Energy (SSE).
Surely, you might understandably think, this uncertainty cannot be good for Scotland. Are we just bystanders or worse – victims – of some never-ending corporate roulette game?
There are some reasons behind it.
First, the entire European, indeed the world, utility industry is in a state of churn. In 2007, according to a survey by PriceWaterhouseCooopers, there were, worldwide, no fewer than 768 takeovers or mergers involving electricity and gas firms with a total value of $372.5 billion, a serious amount of money in anybody's terms. This churn seems to have been unaffected by the credit crunch which should have made borrowing the finance for these deals much harder – 57 per cent of these deals came in the second half of the year. Indeed, the number of final-quarter deals in 2007 was 73 per cent higher (and their value 21 per cent higher) than in the last quarter of 2006.
Europe accounts for a huge chunk of this activity. The PWC survey says that 36 per cent of the utilities that were targets of takeover were European and 43 per cent of the predator firms were European. That's partly because, in uncertain economic times, utilities are usually reliable producers of a steady stream of income. It is also an industry where economies of scale apply – put two firms together and you generally get more profit than came from the firms separately.
The barriers to merger and acquisition in the utility sector have generally been artificial ones created by governments to preserve national industries. Now that these walls are being steadily removed as governments have learned that protectionism cheats consumers by imposing high prices, it is not surprising that takeovers are proceeding apace.
Second, we are at the start of a period of huge investment by the electricity-generating industry, particularly in Europe, where a big array of power stations are nearing the ends of their lives. One European Commission estimate says that about £500bn needs to be invested over the next 20 years to ensure Europe's lights stay on.
This is clearly a game for big players, not minnows. The initial spending stakes are huge, but you can be pretty much guaranteed a profitable income stream from the asset for next 30-50 years. There are exceptions – such as the 1970s oil price leap which rendered the newly-built Inverkip oil-fired station on the Clyde totally uneconomic – but these are exceptions and not the rule.
Against that background, Gálán seemed to be immensely confident that Iberdrola can rise through the storm of speculation and carry on growing and becoming even more successful. He repeatedly rebuffed Spanish reporters' questions on whether there were any moves to talk to Electricité de France and its reported interest in buying Iberdrola. He was even more dismissive in persistent questioning about a possible merger with Gas Natural, Spain's largest gas supplier.
In response to a question from The Scotsman, he agreed that he was much more focused on creating a world champion energy company than a Spanish national champion energy firm.
As to any hostile bids, they would have to better Iberdrola's forecast 16 per cent annual earnings per share growth before the board would even consider them. Indeed, Iberdrola's integration of ScottishPower, achieved in just five months, he boasted, should become a business school model case study.
Shorn of hyperbole, Iberdrola's progress under Gálán is undeniably impressive. A 250 per cent increase in total shareholder return between 2001-7, is a record few companies, including the touted predators, can match. Gálán gleefully paraded the comparable fact that, over the same period, the total shareholder return achieved by Eurostoxx utility firms was just 32 per cent.
These sort of numbers are Iberdrola's real defence against a hostile takeover and the reason why it is much more likely to be doing any taking over. But what do we in Scotland get from that?
The answer is that a large part of our electricity supply is owned by an efficient and extremely competitive company. It means we all benefit as, whether we are industrial or domestic consumers, our electricity should remain, relative to users in other countries, cheap.
It does require competition and, in that respect, it should not matter to us if SSE gets taken over. What does matter is that any new owner should carry on competing.
In the same way, we should applaud the fact that British Energy may be bought or, more likely, enter into consortiums to build new nuclear power stations. Regrettably, these seem unlikely to be built in Scotland. The consoling factor is that the British electricity market should continue to have diverse sources of supply which again should help keep prices down. And continuing to have some of the lowest electricity prices in Europe is the competitive edge we need to keep.
•Cogent comments and constructive criticism welcomed at pjones@ednet.co.uk.
The full article contains 1006 words and appears in The Scotsman newspaper.
