ANALYSIS-Dutch utilities offer rare buying opportunity

AMSTERDAM, Aug 27 - The two largest power utilities in the Netherlands are looking for foreign partners and present an increasingly rare opportunity for a wide range of potential suitors in a consolidating European market.

The Dutch utilities Essent and Nuon, which failed to merge in September last year, both said in June they were looking for an international partner for their production and delivery units which they are separating from their network arms.

Analysts say the relatively small size of these units would make them attractive to foreign firms.

While larger utilities such as Germany's E.ON are likely to be interested in a stake or cooperation with the Dutch firms, analysts say smaller and more regionally limited players could also see them as an opportunity to expand across borders.

"Following the consolidation of European utilities, you do not have that many opportunities left, so everybody will be interested," said Herve Gay, analyst at Societe Generale.

Smaller European players, such as Denmark's state-controlled oil and gas group DONG Energy or British utility Centrica, could use an alliance for growth in continental Europe.

Experts have estimated Essent's production and delivery operations could be worth about 6 billion euros ($8.9 billion) and Nuon's more than 5 billion euros.

Essent and Nuon, both owned by local and regional authorities, called off plans to create a merged entity valued at 24 billion euros last year, saying conditions were not right.

They then began to split their commercial production and delivery operations from their gas and electricity transport networks ahead of a law that requires them to do so before 2011.

Existing as small players in Europe is now a challenge in a market which has undergone a wave of consolidation, as larger utilities have the advantage, for example, when it comes to negotiating contracts for energy supply and equipment.

INTERESTING ASSETS

A presence in the Netherlands could provide several strategic opportunities for foreign partners, including access to production assets and clients as well as regional expansion.

"Production capacity is a very interesting asset for every big utility in Europe. The Germans have huge investment plans and I think it would fit quite well," said Stephan Wulf, analyst at Sal. Oppenheim.

"But also looking to France and utilities which are further away: they might also be interested in generation capacities."

Koen Dierckx, analyst at KBC Securities in Brussels, also highlighted the Dutch production assets as well as their renewable energy activities.

"Nuon and Essent have a number of gas-fired power plants which are pretty new and recent, and both have an important renewables position," Dierckx said.

Analysts also pointed to the Netherlands' strategic regional positioning.

"This will be a good opportunity for external growth in a market which is strategically located between the north, the west and the southern part of Europe," said Gay.

"They are at the centre and that can be quite useful, especially given the development of cross-border transmission capacities and efficient trading activities."

If smaller regional players want to grow, they will have to grow outside their borders, said Dierckx.

"This could become a very good starting point for a bigger utility based in Europe," he said.

Essent said in June it had agreed with shareholders that it was vital for its commercial arm to join up with an international partner. Nuon has also said it plans an alliance for its production and supply arm, and that it wants a partner to take a minority stake.

Either investment would pale in comparison with major utilities deals such as Enel and Acciona's 42.5 billion euro buy of Spanish utility Endesa last year.

But some analysts also did not rule out the chance that proposals to merge the companies could be revived.

"I would not be so sure that such a merger is dead," said Gay. "It has been attempted in the past, then abandoned, then it has been revived, so it is also a possibility, that they could come back with a new plan."

Essent reported sales of 7.4 billion euros in 2007, while Nuon made 5.65 billion euros.