Shepherd and Wedderburn LLP
  January 12, 2006 - Spain

Gas Natural/Endesa: Where Art Thou Romeo?
  by John Schmidt

Gas Natural’s high profile courting of Endesa has had a choppy ride on the roller coaster ship of public takeovers. Not only is the desired companion resisting the marriage, but also is she summoning the high waves of competition law in her defence. Not much of the public debate of the competition law aspects is focussed on the merits of perhaps one of the last industry transforming mergers in the Spanish energy markets. Rather, the wrangling concentrated on a number of technicalities that may enthuse lawyers, lobbyists and deal tacticians, but ignores wider and more fundamental issues of how mergers are reviewed in Europe and its member states. This play comes in three Acts. In the first Act Endesa seeks (but ultimately fails) to persuade the European Commission to review the case. In the second Act, the Spanish competition authority seemingly questions the legality of part of the deal in its report to the minister. The third Act is yet to unfold. Act I, Scene 1: (enter Iberia, looking upset, and Europa, looking confident) The first issue arose from a wrangle as to whether the two-thirds rule was met. Endesa complained to the Commission that the parties had got their sums wrong. Act I, Scene 2: (enter Autoridade and her twin sister Autorità) The Portuguese and Italian authorities offered formally to refer the case to the Commission, but, crucially, Spain did not join that request. The European Commission rebuffed the authorities’ offer and held that the local authorities are best placed to review the case. Act I, Scene 3: (enter Commissario, looking angry) The Commission rejected Endesa’s complaint that the parties had miscalculated turnover and confirmed that the two-thirds rule was met. However, despite the rebuff in Scene 2, Neelie Kroes raises the political stakes by claiming that such a deal should be reviewed in Brussels. The statement contained a very thinly disguised implication that the Spanish authorities may be unduly inclined to allow the creation of a national champion and called for a fundamental change to the jurisdictional rules of merger control. Act II (enter Servicio de Defensa de la Competencia, looking perplexed) The focus now shifts to Spain. According to the press, the Spanish competition service’s case report to the minister apparently questions whether, as a matter of Spanish law, it is possible for Gas Natural to sell off, in a pre-agreed deal with Iberdrola, certain parts of the target that would otherwise give rise to competition issues. A cynic may suggest that the Spanish authority’s seemingly critical approach could be aimed at countering the Commission’s implications that it may be unduly biased in favour of the parties. Whatever the reason, the danger of relying on legal technicalities is to politicise the review of a case and divert the attention from the real issue of whether or not the transaction, as presently structured, harms competition. The Spanish authority’s scepticism in respect of the pre-disposal, if accurately reported, may also raise an eyebrow or two in the rest of Europe, where break-up bids and pre-merger disposal agreements form part of the standard toolkit of deal making. Break-up bids are sometimes used to avoid a lengthy competition investigation, but this is not necessarily the only, or the driving, reason. Often it is an amalgam of competition, tax, deal mechanics and valuation reasons that lead to such a structure. For example, Saint-Gobain is currently seeking a purchaser for parts of BPB to fund the BPB acquisition. Wouldn’t it be odd if a break up bid were permissible if it were needed to fund a bid but not if it were designed for competition reasons? If there were more than one reason, would the authority have to establish which is the key driver for that structure? All of this would make merger reviews messy and more susceptible to political influence. More fundamentally, the job of the competition authority is not to decide whether it likes a particular contract or deal structure. Its function is not to engage in industrial engineering, but to decide whether a particular deal harms competition. While this latest tussle could on one level be seen a technicality of Spanish law, this would be too simplistic a view. The debate raises issues that go beyond the narrow scope of legal niceties. First, it raises the fundamental question of whether companies should be able to merge with other companies in a way they regard as creating value. If a company feels that it would achieve most value by taking over only parts of a company, or by teaming up with another company to break up the target’s business, why should the contract itself be invalid? Connected to this are general legal principles such as the freedom of contract and the right of property ownership, as well as the European freedom of movement of capital. More importantly, if Spain decides to adopt an approach that differs significantly from that of other member states, it would be fuelling the debate of whether it makes sense in the world of cross border mergers to have significantly diverging merger control regimes. It could help support a call for a harmonized European system of merger control and could add momentum to the Commissioner’s drive to bring more mergers within Brussels jurisdiction. Let us hope that, as Act III unfolds, the Spanish decision makers do not politicise the case by relying on legal technicalities to achieve a politically opportune outcome. They should decide the case on its substantive merits of whether or not the deal, as structured, would harm competition. [This article was first published in Competition Law Insight - see below for a link to the publication.]


Footnotes:
John Schmidt is a partner specialising in competition and regulation with UK law firm Shepherd and Wedderburn LLP (Tel.: +44 20 7763 63 88).


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