Spanish companies head for global role -- Gamesa and Iberdrola deal underpins ambitious strategy

Spanish wind giants Gamesa Corporación Tecnologica and utility Iberdrola finally bowed to the inevitable last month and announced a three pronged framework agreement to further align their respective wind businesses. With the agreement, Gamesa has not only laid down its cards in its bid to dominate world turbine sales, but also Iberdrola has underlined its intention of consolidating its role as a major renewable energy utility at home and abroad.

Whether combining two Spanish companies from the small Basque region will create a global wind power juggernaut, however, remains a moot point. Indeed, the announcement was accompanied by a deal less hype about global dominance than previous Gamesa splashes on the stock exchange, perhaps in silent recognition of the underlying defensive nature of the deal: keeping Italian utility Enel out of the Spanish wind market and strengthening Iberdrola's position following its estrangement from Energia Hidrolélectrica Navarra (EHN).

The details

In the deal, Iberdrola, which owns 18.89% of Gamesa, has agreed to buy 982 MW of wind plant developed in Spain by Gamesa Energía between 2002-2006 for around EUR 1100 million. The first 666 MW will be handed over by the end of the year for EUR 693 million. Second, Iberdrola has signed up to buy a minimum of 1100 MW of turbines made by Gamesa Eólica at a discounted price. Third, both companies have agreed to create two joint ventures for renewable energy development, each controlled 60% by Iberdrola and 40% by Gamesa. One joint venture will concentrate on development in the regions of La Rioja, Castile La Mancha and Castile and León, where Iberdrola controls electricity distribution. The other will develop projects mainly abroad, initially France, Britain, Holland, Ireland, and Belgium.

Iberdrola says that all three points of the deal are mutually exclusive. This means that the turbine sales deal is separate from any projects under the new joint ventures.

On the back of the deal, Gamesa CEO Iñaki López Gandásegui announced the group's strategic plan for 2003-2005: Growing in the Wind. Gamesa's huge debt, EUR 840 million at the end of 2001, will be slashed to EUR 489 million before the end of 2002 and by a further EUR 229 million by the close of 2003 -- a 72% reduction overall. The debt is largely the result of Gamesa's purchase of the 49% it did not already own of Gamesa Eólica; 41% from Vestas of Denmark and 9% from the Navarra regional government's holding company, Sodena.


Following the sale of its development pipeline, Gamesa now confidently forecasts end-year profits of EUR 102 million, 64% up on 2001's figure -- not including EUR 57 million extraordinary capital gains from the deal -- compared to its mid year 25% forecast for 2002. Earnings per share, currently at EUR 1.26, are also forecast to triple by 2005.

The capital injection offers "new investment opportunities," says Gandásegui. He confirms that development and sale of wind stations will continue to be a major source of income and a major outlet for Gamesa's core business: turbine sales. This year, Gamesa Energía expects to bring online a total of 300 MW in Spain, bringing its cumulative tally to 803 MW, and repeat that annual development pattern to 2005. Overseas, it expects to bring its first 100 MW online next year, followed by 220 MW in 2003 and 330 MW in 2005. Overall, Gamesa is aiming at 2403 MW online by 2005, including the Iberdrola sale. Around 650 MW of this will be abroad, with most advanced projects in Portugal, Italy and Greece.

While analysts question the wisdom of a turbine manufacturer selling turbines to itself, Gamesa's expectations remain high. "We believe that over the next three or four years Europe and North America will represent a high proportion of our business," says Gandásegui. Today, 98.4% of total Gamesa Eólica sales are in Spain. Gandásegui expects this to be nearly 55% by 2005.

All in the family

Had Gamesa sold its 982 MW development pipeline to bidders other than part-owner Iberdrola, its market value might well have been higher. Aside from Enel, the losing bidders included Britain's Carlysle investment group and major Spanish wind developers Sinae and Acciona. But the sale to Iberdrola seems to have been a foregone conclusion: Iberdrola needed the deal to compensate for its failure with EHN, its main wind-developing ally to date, and used its family ties to pull the deal. Iberdrola's part ownership of Gamesa is via its 50% participation in the IBV investment group, which owns 37.78% of Gamesa. The other half of IBV belongs to bank Banco Bilboa y Vizcaya Argentaria.

Both Gandásegui and Iberdrola shun any accusations of nepotism. They point out that 1100 MW in advanced turbine orders as well as the vertical synergies from developing jointly in Iberdrola's power distribution areas constituted by far the best offer, on its own merits. Whatever the case, the stock market has responded favourably, especially to Gamesa. Immediately after the deal Gamesa shares rose three days in a row, by 4.76%, 4.55% and 1.28%, though subsequent falls have kept it hovering around EUR 17. Although this is still far from the company's target value of EUR 21, analyst concerns regarding Gamesa's huge debt have evaporated and the recommendation is strongly on buy.

The stock market response to Iberdrola's part in the deal was less defined: its renewables activities are diluted within the whole of its generation and distribution business. But if Iberdrola decides to float its renewables business, IberRenova, next year, the effect of the Gamesa deal on company value will become far more transparent. The suggestion that IberRenova might become a public company in its own right has been put forward by Expansión, a financial newspaper. Iberdrola sources say that an eventual flotation depends on an improved stock market climate, "among other factors."

IberRenova's renewables strategic plan or 2002-2006 targets 3500 MW of wind. Largely thanks to the Gamesa deal, IberRenova will have achieved 79% of this objective by the end of 2003. With more liberalisation of Spain's electricity market allowing all consumers to choose their supplier from January, the Gamesa deal also boosts Iberdrola's green marketing efforts.