EDF has Other Cards to Play Without British Energy

If EDF fails to persuade British Energy shareholders to accept its bid, the French group will not be short of options or cash to build on its global nuclear leadership and develop new businesses such as gas.

EDF was due to unveil a full cash £12bn ($23.61bn) offer for British Energy recently, after months of talks and securing approval from the UK government, which owns 35% of the British nuclear power plant group.

But institutional investors in British Energy unexpectedly rejected a bid they deemed too low, sending EDF back to the negotiating table, and threatening to derail a deal some see as crucial for Britain's nuclear rebirth and EDF's expansion plans.

Although both companies are still talking, industry watchers believe EDF is unlikely to raise the stakes and risk overpaying for British Energy, the owner of most of Britain's existing nuclear power plants and whose land around existing sites is expected to house new developments.

"EDF doesn't seem ready to make an acquisition at any cost, and this is rather good news for investors," said fund manager Jacques-Antoine Bretteil at International Capital Gestion. But failing to close in on British Energy would not mark the end of EDF's ambitions in Britain, industry experts said.

British utility Centrica said it might revive plans to merge with British Energy. However, a government spokesman told Reuters on Monday that Britain's preferred option remained a takeover by EDF.

Alternative scenarios

"British Energy would have been an ideal entry point for EDF, and EDF may have regrets about the deal not happening, but this doesn't at all slam the British nuclear door in their face," said Colette Lewiner, and energy sector expert at French management consultancy Capgemini.

"If a deal does not materialise, British Energy will be encouraged to strike partnerships on [new nuclear] sites, so it will just involve a different scenario for EDF," she added. EDF, the world's biggest single producer of nuclear energy, could therefore still be at the spearhead of Britain's nuclear power rebirth, but this time by striking joint ventures or building new-generation reactors on its own land.

In May, the French group bought land next to two nuclear power plants in Britain – at Hinkley Point in southwest England, and Wylfa in north Wales – in the hope it can build new reactors on the sites and use the grid connections and infrastructure around existing reactors on adjacent land.

But Britain is only one of four countries EDF is targeting for its international development, with ambitious nuclear plans in the US, South Africa and China, where it will run two new-generation reactors with China Guangdong Nuclear Power Corp.

EDF has set aside €35bn for investments between 2008 and 2010, and if this is not used for acquisitions, it will be spent on industrial projects to fuel organic growth. "Why would they necessarily need to make acquisitions? They have this massive investment plan which will continue to support their development," said an analyst who asked not to be named.

In its core nuclear power business, Lewiner said EDF had 'many irons in the fire' with its international development and plans to flesh out its French fleet of 58 reactors with one, and maybe two, new-generation European pressurised reactors (EPRs).

"They will need money for these projects. Just in Britain, they must buy land and build reactors. We're talking about a few billion euros for each one, which is not trifling," she said.

Gas foray

EDF also has projects to build a gas business to counter the threat of customers leaking away to the newly merged GDF Suez group, which can offer a one-stop shop for electricity and gas.

EDF, which produces continuous electricity from 58 reactors in France, also needs to invest in gas-fired plants, which can be switched on and off fast to meet peak electricity demand.

"If you want to operate these gas-fired plants in a profitable way, you need to have good access to gas," said analyst Koen Dierckx at broker KBC Securities in Brussels. EDF, which in June got the green light to build one of Europe's biggest liquefied natural gas terminals in the port of Dunkirk in northern France, may seek to secure gas imports from producers such as Qatar, or invest in gas fields, experts said.

"If they want to invest in a field, it will be very costly. Instead, I see them taking stakes in fields," Lewiner said.

Dierckx estimated EDF could spend nearly €5bn euros to fund a thrust into the gas sector, roughly the price of Belgian gas firm Distrigas, which EDF lost out to Italy's Eni in a bidding process organised by Suez in June. "Distrigas was definitely a very interesting asset that was on the market. Gas Natural is another one, but with Union Fenosa now they will probably become too big," Dierckx said, referring to Gas Natural's recent deal to buy a 45% stake in Union Fenosa from debt-laden builder ACS.

"They may just try to grow the gas business organically with not so much of a focus on acquisitions at this time," he added.