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Italian utility Hera faces few merger options

MILAN - Italian multi-utility Hera SpA finds itself encircled by potential rivals following the collapse of merger talks and with few options for a tie-up as a way to spur growth.

Hera, one of Italy’s biggest multi-service utilities, faces political hurdles to possible mergers and has fewer prospects to develop its gas business in a country that imports 85 percent of it.

The best tie-up options for Hera, Italy’s third-biggest retail gas trader, include E.ON AG as Germany’s biggest utility seeks to boost its Italian presence, and smaller regional companies Iride SpA and Enia SpA.

The latter two carry a fraught history, however, with talks on a three-way merger with Hera breaking down two months ago. Both have said they are open to renewed talks.

‘From being a leading operator in north, north-central Italy at least, the company has gone into a situation of being encircled,’ said Alessandro Bianchi, chief executive of Nomisma Energia, a think-tank in Hera’s hometown of Bologna.

Hera is controlled by a pact of municipalities and faces political uncertainty as Bologna, its biggest shareholder, heads into city elections in April.

CAUGHT IN THE DOWNTURN

Fabio Sciscio, a corporate finance partner at KPMG, said Hera, with its share price halved this year, had been caught in the credit crisis that has halted merger activity.

Until markets revive, those negotiating a merger could be accused of settling a deal from a ‘weakness standpoint rather than from strength’, a politically thorny point, he said.

Hera, which has a market value of about $2 billion, is the dominant utility in Emilia Romagna, a manufacturing region.

Its gas sales total about 2.3 billion cubic metres a year, with power sales at 4.3 gigawatt hours. Hera has made acquisitions a big part of its expansion plans, buying five small utilities since 2004.

A three-way deal with Iride, a Genoa-Turin company, and Enia, also based in Emilia Romagna, would have created a utility reaching across much of northern Italy.

It also might have given Hera greater access to gas, in part because Iride has 30 percent of gas group Plurigas SpA, with Lombardy utility A2A SpA holding the rest.

But the talks failed, with Hera citing difficulties over the timeframe.

BOLT FROM THE BLUE

‘The failure of the talks was a bolt from the blue. I think that there is a strategic deficit in terms of size and in terms of (gas) supply,’ said Nomisma’s Bianchi.

He added that Hera could continue to buy up smaller local companies, but could be hemmed in by a merged Enia-Iride, former monopoly Enel SpA and energy group Eni SpA.

E.ON also is a potential rival-or merger partner-as it takes over Italian assets of Spain’s Endesa SA as part of an accord with Enel, which bought Endesa last year.

However, Hera’s management has always ruled out a foreign partner, Equita analyst Stefano Gamberini said in a research note. Other options are politically unpalatable, he said.

They include expansion into northeast Italy, with its fragmented utilities sector; Rome’s Acea SpA, Italy’s biggest water company; or A2A, Italy’s biggest regional utility by market value.

However, A2A itself has been roiled by political squabbles since it was formed by the merger of the Milan and Brescia city companies this year.

Acea also has undergone a management makeover by Rome’s new centre-right government and has been focused on talks with France’s GDF Suez to develop power and gas businesses.

A deal with Acea could generate political sparks as well, since Rome’s mayor is a former neo-fascist and Bologna is a centre-left stronghold known as ‘the red city’.

Hera trades at a price/earnings ratio of 9.75 for 2009 earnings, in line with other regional utilities, according to Reuters data. Its dividend yield is 7.35 percent for 2009 earnings, also in line with the sector.