Iberdrola to buy Scottish Power in $22.5 bln deal

MADRID/LONDON, Nov 28 (Reuters) Spain's Iberdrola is to buy Scottish Power for an agreed 11.6 billion pounds ($22.5 billion), they announced on Tuesday, to create Europe's third-biggest utility and a world leader in renewable energy.

Iberdrola, Spain's second-largest utility, said it would pay 400 pence in cash and 0.1646 new shares for each Scottish Power share, worth a total of 777p a share at Monday's close. The price includes a Scottish Power 12p special dividend.

The value of the long-awaited bid is below the expected 800p a share, and Scottish Power shares fell 0.8 percent to 740p.

Iberdrola fell 2.1 percent to 32.06 euros, while the DJ Stoxx European utilities sector index dropped 0.7 per cent.

''The mix of cash and Iberdrola shares will not appeal to all investors, but we do not see this as an insurmountable obstacle,'' said Jim Stride, head of UK equities at AXA Investment Managers, which owns 2 percent of Scottish Power.

Some analysts and bankers said that while the price offered was high, the share component of the deal could leave room for a rival bid and that Scottish Power investors might be persuaded by a lower offer if it were all in cash. Sweden's Vattenfall and France's EDF have been tipped as possible rival suitors.

However EDF, which already has sizeable UK operations, would face a regulatory review if it bid for Scottish Power, and Vattenfall may not have enough cash to afford it, bankers and industry sources added.

Germany's RWE, another touted counterbidder, ruled itself out on Tuesday.

PRICE VIEWS Exane BNP analyst Jose Javier Ruiz Fernandez said Iberdrola was paying a price broadly in line with recent sector deals and he saw little prospect of a counter-offer.

''I think it is a good move (by Iberdrola),'' he said.

''They're paying the sector average, it's slightly value-creative and it's a new platform of growth, especially in renewables.'' Ruiz Fernandez said the price Iberdrola was paying put Scottish Power's enterprise value at 12.2 times its forecast earnings before interest and tax (EBIT) for 2007, in line with the European utilities sector average of 12.3 and with German group E.ON's recent bid for Spain's Endesa.

Europe's utilities are consolidating as governments ease takeover rules and firms are bolstered by high energy prices and cost cuts. Scottish Power, Britain's fifth-largest energy supplier, has long been viewed as a target. Last year it rejected a 570-pence-a-share offer from E.ON.

After buying Scottish Power, Iberdrola will trail only France's EDF and E.ON among Europe's biggest utilities.

Iberdrola Chairman Ignacio Sanchez Galan said the deal would also make it easier for his firm to merge with another Spanish utility, because it would now be subject to European regulators, who were likely to take a broader view of moves to build a dominant position in the Spanish market than would local regulators.

Since Spanish builder ACS bought 10 percent of Iberdrola, there has been speculation by analysts and media that ACS could push for a merger between Iberdrola and Union Fenosa, in which it is also the leading shareholder.

RENEWABLES ''The new company will be a leader in the energy sector, with a more balanced business portfolio and at the head of the global windpower sector,'' Galan said of the deal with Scottish Power.

Iberdrola said it would fund the purchase with credit worth up to 7.96 billion pounds backed by ABN AMRO, Barclays and Royal Bank of Scotland. The equity part of the deal equates to 21.4 percent of its enlarged share capital.

Iberdrola said it also planned to sell over 1 billion euros ($1.3 billion) of its assets within a year of completion.

The deal will immediately boost its earnings and generate at least 88 million pounds in annual pretax operating cost savings, it said, adding it would not affect its dividend policy.

Iberdrola's head of strategy Jose Luis del Valle said that, based on analysts' forecasts, the combined group would increase net profit from a pro forma 2.1 billion euros in 2005 by an average of 14 percent a year until 2009.

In the credit derivatives market, the cost of insuring Scottish Power's debt against default fell on the prospect of its acquisition by the more creditworthy Iberdrola.

Five-year credit default swaps on Scottish Power fell 3 basis points to 21.5 basis points, and those on Iberdrola fell 1.5 basis points to 20 basis points, a trader in London said.

Spanish companies are flush with cash, fuelled by a decade of economic growth and cheap financing, and its tax laws also give firms a break on foreign-acquired goodwill.

This has fuelled a string of purchases in Britain, one of the world's most open markets for takeovers. Earlier this year, Spanish builder Ferrovial bought Heathrow airport owner BAA.

Iberdrola is being advised by ABN AMRO, while Morgan Stanley is acting for Scottish Power.

REUTERS SBA BST0112