VZCZCXRO2268
RR RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV RUEHSR
DE RUEHTC #0132/01 0561520
ZNR UUUUU ZZH
R 251520Z FEB 09
FM AMEMBASSY THE HAGUE
TO RUEHC/SECSTATE WASHDC 2578
INFO RUEHAT/AMCONSUL AMSTERDAM 4148
RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS SECTION 01 OF 03 THE HAGUE 000132 
 
SIPDIS 
 
STATE PASS FEDERAL RESERVE BOARD - INTERNATIONAL DIVISION, TREASURY 
FOR IMI/OASIA.VATUKORALA, USDOC FOR 
4212/USFCS/MAC/EURA/OWE/DCALVERT 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PGOV PREL NL
SUBJECT: FOREIGN TAKEOVERS OF DUTCH ENERGY COMPANIES 
 
Ref: 08 THE HAGUE 246 
 
THE HAGUE 00000132  001.2 OF 003 
 
 
¶1. SUMMARY:  Following the Essent takeover by Germany's RWE on 
January 22, Nuon announced February 23 that it had agreed to a 
takeover bid by Sweden's Vattenfall.  Two other large Dutch energy 
companies have been linked in the media to takeover discussions.  In 
addition to competition issues, Essent's takeover has raised 
concerns about foreign ownership of a nuclear plant, RWE's 
environmentally unfriendly image, and energy security in the 
Netherlands.  End summary. 
 
 
----------------------------- 
DUTCH UNBUNDLING LEGISLATION 
----------------------------- 
 
¶2. The Dutch unbundling law that became effective July 1, 2008, 
forces the public gas and power companies to divest their network 
holdings by January 1, 2011.  This will create two types of energy 
companies: regulated network companies applying users' fees set by 
the central government (the DTE, or Office of Energy Regulation), 
and distribution companies dealing with trade, supply, and 
production.  The law, which energy companies strongly opposed, aims 
to increase network efficiency and reliability and cut costs, 
primarily to industrial and business customers (reftel).  Some 
smaller energy companies already comply with the law, but the four 
largest companies are still in the process of unbundling their 
activities.  As the networks form a significant part of energy 
companies' assets and income, divesting them makes Dutch companies 
financially weaker and therefore easier targets for takeovers by 
foreign energy companies - especially if those firms (like RWE) have 
not yet unbundled themselves.  Dutch companies also assert that, as 
smaller entities, they need to merge with others for economies of 
scale, as only large companies can secure favorable terms in 
strongly fluctuating fuel markets. 
 
------------------ 
TAKEOVER OF ESSENT 
------------------ 
 
¶3. The current owners of Arnhem-based energy company Essent are five 
Dutch provincial authorities that hold 74 percent of Essent's 
shares, while the remaining 26 percent are owned by multiple Dutch 
municipalities.  Essent, which has over 2.6 million private and 
business consumers in the Netherlands and approximately 7800 
employees, provides its customers gas, electricity, and waste 
management services.   The company had revenues of 6.6 billion euro 
in 2008.  Its announcement on January 22 that it had accepted a 9.3 
billion euro all-cash takeover bid by German RWE came as little 
surprise, as Essent had been in discussions with other takeover 
candidates including Sweden's Vattenfall, Denmark's Dong, and 
Italy's Eni for several months.  RWE's bid is for all Essent's 
shares, excluding the waste management operations and network which 
must remain public property.  If 80 percent of the shareholders, as 
well as European competition authorities, approve the deal, it will 
make RWE the fourth largest energy company in Europe.  According to 
Essent, the deal will ensure the company's "long-stated ambition to 
play a leading role in consolidating the North-West European energy 
market."  Essent CEO Michiel Boersma also stressed that economies of 
scale are essential for energy companies.  Since Essent's previous 
merger discussions with Nuon had failed, Essent had to look outside 
Dutch borders for a large international partner. 
 
¶4. Essent's takeover faces two major complications.  One is that 
Q4. Essent's takeover faces two major complications.  One is that 
Essent owns 50 percent of the association that manages the 
Netherlands' only nuclear plant in Borssele; energy company Delta 
owns the other 50 percent.  According to the nuclear plant's 
Articles of Association, it must remain public property.  Although 
Delta has publicly offered to buy Essent's 50 percent stake, RWE 
wants the nuclear plant included in its takeover of Essent.  RWE CEO 
Jurgen Grossman stated February 14 that he is very optimistic about 
RWE's bid to become a co-owner of the Borssele plant, and that RWE 
is seeking to invest in new nuclear plants in the Netherlands if and 
when the opportunity arises. 
 
¶5. The second complicating factor is RWE's poor environmental 
record, which does not mesh with Essent's goal of increasing 
sustainable energy production.  The World Wildlife Fund recently 
ended its partnership with Essent in protest over the proposed sale. 
 Essent's CEO explained that Essent had to consider several factors 
in the deal, including RWE's track record on environmental issues, 
management, and fiscal performance, as well as EU competition rules. 
 Boersma noted that the deciding factor in RWE's favor was the 
security of RWE's financing.  RWE has committed to investing between 
4 and 5 billion euro in Essent after the takeover and has stated 
that it is planning to significantly decrease its CO2-emissions. 
 
THE HAGUE 00000132  002.2 OF 003 
 
 
Essent would keep its name for the time being, although two of its 
four board members would be appointed by RWE.  Despite the two 
obstacles noted above, Essent shareholders and EU competition 
authorities are widely expected to approve the deal, and RWE expects 
to conclude the takeover in the third quarter of 2009. 
 
---------------- 
TAKEOVER OF NUON 
---------------- 
 
¶6. Nuon announced February 23 that it had agreed to an all-cash 
offer of 8.5 billion euro by Sweden's Vattenfall for Nuon's 
production and supply company, leaving Nuon's network company 
Alliander outside the deal.  Owned by provincial Dutch authorities 
and municipalities, Nuon is a gas and electricity provider with 
10,000 employees and 3 million customers.  It recorded a net profit 
in 2008 of 765 million euro - down 13 percent from its 2007 profits. 
 Vattenfall, 100 percent-owned by the Swedish government, initially 
will acquire 49 percent of Nuon's shares, with fixed terms in place 
to acquire the remaining shares over the coming six years.  Nuon and 
Essent had been in takeover discussions with several of the same 
firms, including Denmark's Dong and Italy's Eni.  Nuon CEO Oystein 
Loseth asserted that "Vattenfall is a strong force in combating 
climate change.  Our partnership will boost Nuon's investment 
program for new, cleaner production and innovative energy 
technologies for our customers." 
 
¶7. Earlier in February, the Province of North Holland, which owns 9 
percent of Nuon's shares, expressed opposition the sale, citing 
fears that foreign management would always place commercial 
interests above larger production and supply demands.  The province 
called on the national Dutch government to purchase 15 percent of 
Nuon's shares to sink the deal, but the national government has 
refused to intervene.  North Holland now appears resigned to the 
takeover and reportedly has agreed to sell its shares to Vattenfall. 
 "If [the sale] must happen, then Vattenfall is not a bad party," 
quipped a provincial representative.  Meanwhile, the Province of 
Gelderland, which owns the largest share of Nuon (44 percent), is 
enthusiastic about the deal.  Pending approval by Nuon's 
shareholders, the transaction is expected to close by the end of the 
second quarter of 2009. 
 
¶8. The two other large Dutch energy companies, Delta and Eneco, have 
not announced any takeover plans, although Germany's E.ON is rumored 
to be interested in Eneco. 
 
---------------------------------------- 
GOVERNMENT NOT PLEASED WITH DEVELOPMENTS 
---------------------------------------- 
 
¶9. Economic Affairs Minister Maria van der Hoeven (responsible for 
Dutch energy policy) is not pleased with the idea of allowing 
foreign takeovers by companies like RWE that have not yet unbundled 
their own networks from production activities.  Vattenfall, on the 
other hand, has already unbundled.  Van der Hoeven plans to "express 
her concerns" about RWE's deal with Essent to the European 
Commission, which must still approve the takeover.  She also 
expressed regret that the EU's unbundling legislation has not yet 
been implemented by all Member States, including Germany and Italy, 
and that due to this lack of implementation she has no legal means 
by which to prevent the Essent takeover.  Van der Hoeven denied, 
however, that the Dutch energy market is in any danger of 
destabilization from foreign takeovers.  She pointed out that 
Qdestabilization from foreign takeovers.  She pointed out that 
currently "there are 15 energy suppliers active in the Netherlands," 
and "40 percent of electricity already comes from plants owned by 
foreign entities." 
 
¶10. Several Dutch parliamentarians (MPs) had objected to the 
implementation of Dutch unbundling legislation in 2008, primarily on 
the grounds that Dutch energy companies would become takeover 
targets.  Labor Party MP Diederik Samsom called the Essent takeover 
"hasty and unwise," pointing to RWE's poor environmental record and 
lack of unbundling.  He had fewer reservations about Nuon's 
takeover, however, as the process will be more gradual. 
Importantly, Vattenfall also has a better environmental record and 
has already unbundled its activities.  The largest Dutch opposition 
party, the Socialist Party, strongly opposes the foreign takeover of 
energy companies in general, arguing that these companies "fill an 
important task in society and should not be privatized."  According 
to Socialist MP Paul Janssen, "commercial parties are only 
interested in making a profit and are less keen on sustainable 
energy production."  He conceded, however, that purchasing alliances 
could help produce economies of scale. 
 
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COMMENT 
 
THE HAGUE 00000132  003.2 OF 003 
 
 
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¶11. Comment:  It is highly unlikely that the current trend of 
foreign takeovers of Dutch energy companies will change national or 
European unbundling legislation.  Essent and Nuon's takeovers came 
as little surprise, given that they had been in discussions with 
foreign suitors even before the implementation of the Netherlands' 
unbundling law on July 1, 2008.  Despite rhetoric from some 
politicians to the contrary, foreign ownership of Dutch energy 
companies will not undermine national energy security.  Almost half 
of the country's electricity already comes from foreign-owned 
plants, and by law the Dutch energy networks remain public property. 
 Foreign ownership does have one drawback, however, in that it 
limits the influence of provincial and municipal governments - often 
the major shareholders in Dutch energy companies - on decisions 
about sustainable energy production.  End comment. 
 
 
GALLAGHER