Banking and Energy in Spain: parallel biographies (but less)‎

It is a "Mediterranean or Latin American" model, which is characterized by the desire to strengthen relations with the Mediterranean and Latin American markets, in which these companies have important stakes. It is commented how banking companies are making this adaptation, how companies in the electricity sector encounter great difficulties in this way, to finish by pointing out the possible solutions to this situation.‎

Structural similarities‎

‎Despite appearances, the electricity sector and the banking sector have great similarities:‎

• ‎Both are characterized by their obsessive search for cost reduction and increased productivity, in order to reduce the weight of their services within the set of costs of the real economy (energy, financial, labor, material and fiscal). They are instrumental sectors for the whole and their efficiency lies in providing the greatest service at the lowest cost, so economies of scale are usually applicable.‎

• Both want to evolve into multi-service enterprises for a broad customer base. Due to the size of balance sheets and resources generated and the current tendency to grow through subsidiaries and investees, each company usually has an important "industrial" portfolio: in banks and savings banks, permanent investments of more than 3% (with exceptions) of the investee company, whatever its sector of activity; in electricity, expanding the generation and distribution of energy to the confines of telecommunications, real estate, and professional services.

• Both have their activity regulated by the State; intervention that was previously justified in the need to guarantee strategic aspects of the functioning of the economy, and that is now based on the defense of the national consumer (modification of the legal ratio that allows to partially liberalize the rules of the game). The concept of European consumer protection is being achieved through the receipt of Community directives in the respective national (local) markets.

• Both come from a post-war institutional framework in which public (state-owned), semi-public (partially state-owned and listed) and semi-private (publicly traded, but whose rules and prices depend on political criteria) coexisted. The excessive state indebtedness, together with the change in the legal ratio, has led to the great confiscation of the late twentieth century, this time with the name of privatization. The current institutional framework in Spain is semi-private in both sectors, while that of other European countries is still public or semi-public in the electricity sector (France, Germany, Italy, Portugal).

• Both sectors face the constitution and development of the European single market from local markets. As they say in Asturias, the sailor hears the waves roar and the miner hears the mine explode: uncertainty and alliances, make the transparent an opaque world and the liberal a world regulated by the defenders of competition. The new single market is born, with still imprecise confines, in which we must survive. Both sectors are in it, with appreciable differences.

The "Gran Vía" Bancaria

The Spanish banking sector began its adaptation at the end of the eighties through partial concentrations: the acronyms of the then called "big seven" banks were hooked into two comfortable banking "talgos", and the boxes were grouped into several "cajarios" trains, to open up to Latin America and Europe with the headquarters effect under control. The trend that the sector follows is within two global lines:

1. Internationalize the activity taking advantage of advances in computing and communications.

2. Disintermediate financial activity by shifting risks from own balance sheets to those of clients.
In short, they are ceasing to be "Bankers" who allocate resources, to adapt as "Managers" of those resources according to the European universal banking scheme (which allows participation in companies). In this sense, the industrial portfolios of banks and savings banks, subsidized by Circulars 4/91 and 5/93 of the Bank of Spain, allow them to participate in the successive privatizations of companies, and to compensate with stability and substance the income statements of the sector. In order to gain critical mass to become "Mediterranean" (or Latin Little Argentine) operators in the process of transnational integration that is approaching under the concept of "European bank", the definition of a "new national banking map" is now proposed that makes the confiscation of savings banks feasible. Although, given the respective evolutions, it would be better to amortize some banking procedures. As for industrial portfolios, they will now be able to vary their sectoral composition by selling the shares of companies that were once strategic and that will be opposed in the near future, materializing significant capital gains without dissuasive tax pressure.

Another thing would be if it were decided to consider as strategic the participation in the capital of the foreign companies that are operating, thus continuing the steps of la Caixa in Deutsche Bank or Santander in Vodafone; in this case, the adaptation to the European electricity market could be tried via shareholders, but it does not seem likely because the figures necessary for this purpose in the smallest Spanish market were already prohibitive.

The electric abdication

In the Spanish electricity sector, the centennial acronyms made partial concentrations similar to the banking ones to make the same trip, but they loaded their balance sheets with excessive external financing whose incidence has not been recoverable via tariffs or via industrial portfolios, nor do they have the possibility of defining a "new national electricity map".

The specialization of its barriers to entry and the lack of vision (or political power) of its managers, among other reasons, had managed to keep the sector sheltered from restructuring; but the persistence of the underlying problem has precipitated the current situation, in which competition in the Spanish electricity market must be ensured while the acronym of the sector is restructured.

The unfortunate thing about this situation is the lack of symmetry, since it arises before adaptation actions have been undertaken in other local European markets in which there are semi-public companies of global importance due to their size and strategic dominance, such as those of the aforementioned countries.

So, instead of attending a partial configuration of the European electricity market, we are left with a simple adaptation of a local Spanish order, in which German and French companies can gain share without having to cede, exchange or dilute their current market shares.

Two episodes illustrate this abdication process

National Strategy:

A.- On Monday, March 13, 2000, the American company TXU, which had 5% of the company Hidroeléctrica del Cantábrico (HC), presented a takeover bid at 21.25 euros per share. At this price, the offer in the control market improved the stock market price by little, since the retail quotes had been "mysteriously" anticipating those of the new offer.

As an anecdote it can be pointed out that the old "tamtam" had worked once again. But the categorical thing is that a new stage had opened in the Spanish electricity sector: that of its opening, to the European electricity market.

Almost a year after this first takeover bid, HC's situation remained unresolved because other competing offers had appeared: Unión Fenosa at 24 euros; Elec. Portugal and Cajastur at €24; Ferro Atlántica and EnBW at 19 euros and then at 25.8 euros; RWE at 26 euros; and, finally, again Ferro and EnBW at 27.3 euros, which are managed by EDD.

The chosen company has a 1.7% share of the Spanish electricity market, which, in turn, represents a 5% share of the European electricity market; that is, the takeover bid affects a company that represents 0.08% of the European electricity market and that does not have special strategic attributes of its own due to its growth or profitability.

It is striking so much interest for so little quota: the price will be of the order of 25 times the profits, which makes HC one of the most expensive electricity companies in the stock markets on the planet; this price is only understood for strategic reasons (access to local market), which are those that apply in the control market.

B.- For their part, Endesa and Iberdrola, seeing the inevitable, proposed a merger proposal from which they have finally had to desist, yielding both because of the conditions required to authorize the operation (too "local" in its concretion without taking into account the demands of competition at European level), and because of the boycott of other entities with diverse and diffuse expectations and pretensions. In both utilities, their industrial portfolios are truly industrial, so they lack representation in financial forums.

Some of the editorials that have been published in this regard are entitled: "Confusion eléctrica", "Política y eléctricas", "Oportunidad irrepetible", "La gran frustración", "El nacionalismo ante la fusión", "Fusión rota", "Fallece el coloso eléctrico español", and others like it. They highlight in one way or another that the Spanish electricity market is open to foreign companies and a solution such as that of the banking sector is considered impossible.

Electrical Perspectives

Thus, it is worth asking about the foreseeable evolution of Spanish electricity companies in the large auction to the plain that seems to have begun. In the first place, we must not underestimate the room for maneuver that Spanish electricity companies still have to try agreements with the leading European companies (whether or not they are semi-public and whether or not they have a prior distribution agreement between them) and thus sell the renunciation of the dream, real but made unviable, of a "Mediterranean" (or Latin) operator in the European electricity sector.

It is also possible that they will raise this alternative again in a different way, which would in my opinion be the preferable solution from a national point of view; there is enough experience, quality and resources for it. Not in vain do some argue that it is called "headquarters-effect" because, in the medium term, it "makes itself felt" in employment -whose defense is carried out by unions, autonomies, towns, councils and other representatives of populated places-, and in tariffs -whose evolution seems to be dealt with by the defenders of competition-.

Another variant, more unlikely but more dynamic, would be the Suez Lyonnaise des Eaux model, by which, in the development of its new vocation of multi-service companies for broad customer bases, the electricity companies reached the provision of financial services and the adoption of "permanent" investments in banks, which would also favor competition in the banking sector.

In any case, it is a process that is likely to alter numerous national balances that we could call "ecological" (a word with which we want to express respect for natural balances in this time of irreverent pragmatism), and that will need a revalidation or catharsis hopefully purifying.

As for the perspective of the shareholders, it is likely, although it is not certain, that they will make good short-term operations, but those that are made, will be safe, in exchange for a certain and thriving local business future.