Putting it about

BUSINESS
Corporate finance in Europe

Feb 24th 2005
From The Economist print edition

Italian financial trouble for France's state electricity company

THINK twice before you offer anyone a put option. That is the lesson that General Motors has just learnt, at a cost of €1.55 billion ($2 billion), from Fiat. Lufthansa, Germany's main airline, is learning it from BMI, a small British one, of which it owns 30% and—if it cannot sell that stake—may yet have to buy out the majority owner for some £225m ($425m). Worst-caught of all is Electricité de France (EDF), France's state-owned electricity generator. It is struggling to escape an Italian deal that could cost it around €4 billion—and maybe more, including the French government's planned float of 30% of EDF itself, due this autumn.

EDF's trouble springs from its 1990s ambitions to move into other European markets while remaining a state-protected monopoly in its own. Its first big acquisitions were British—London Electricity, notably—and have gone fine. But then, with Fiat and others, it set up a holding company, Ital- energia, to bid for Edison, a big Italian power generator. Today, Edison is 62% owned by Italenergia, which in turn is 18% owned by EDF. That 18% hides a sting. In 2002, EDF gave its allies options to sell it their holdings in Italenergia from early this year. They—not least cash-strapped Fiat, with 24.6%—now want to sell.

Worse, at the time of the Edison takeover the Italian government, arguing that Italian power firms were not allowed similarly to buy into France, limited EDF's voting rights in Italenergia to 2%. Yet under Italian law, if EDF were to become the sole owner of Italenergia, it would also have to bid for the missing 38% of Edison.

Edison could be a good buy for EDF. It has just announced a trebling of pre-tax profits in 2004, to €364m. But past spending has left EDF ill-placed, just before a share offering,to raise the billions needed to acquire Italenergia, and then Edison.

True, the €12 billion often cited as the cost to EDF of the two operations is overstated: Edison's €3.8 billion debt could be rolled forward. But debt still figures on balance sheets, and who (certainly not the French government) would lend to buy equity with such limited voting rights?

EDF has been casting around feverishly for a way out. Ithas gone to arbitration in Geneva about the put options, arguing that the 2% limit invalidates them. This may buy it time, but what EDF really needs is a fix. Ideally, it will find new partners in Italy and then stay there, with a fair share of control. But if it cannot get that, it plans to sell out of Italenergia, dealing with the put options as best it can. The affair has now become highly political: it was a topic of discussion when Silvio Berlusconi and Jacques Chirac met in Brussels this week.

One step would be an end to the 2% limit. The European Commission has already challenged this in court, and is awaiting a verdict. Mr Berlusconi could end it voluntarily, especially now the French electricity market is—at least in theory—opening up. Collaboration between EDF and Enel, Italy's biggest power producer, still 42% state-owned, might help: the two firms' bosses, meeting in Rome on February 23rd, agreed to study projects of common interest, nuclear energy included.

But this would not affect the put options. EDF would still have to find the money to buy out its partners in Italenergia. Could Enel buy them out? Even if it were willing, that would raise antitrust eyebrows. Still, EDF's quest for partners has found several Italian municipal suppliers interested in buying into Italenergia. Endesa, Spain's biggest power company, is also interested in the company. So are two or three private-equity groups.

Whatever the answer, it must come soon. The puts will not wait for ever, and the part-privatisation of EDF will have to unless the mess is sorted out.

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