M&A and Investment Banking Enel Acquisition of Endesa – Case Study 1 Table of Contents Introduction Transaction Description Strategic Rationale Financial Impact on Enel Accounts Focus on Equity Swap Contracts 2 Enel Acquisition of Endesa Introduction 3 Transaction Highlights World’s largest utility deal ever given an offer price of €41.3 per share, equivalent to a total EV of €63.6bn Largest cross-border cash offer ever launched by an Italian company and largest PTO ever launched in Spain Rapidly designed and executed, understood to be launched within 2 months from the presentation of the opportunity to Enel The deal represented a transforming transaction for Enel, consolidating its presence in the European and Latin American electricity market 4 Global M&A in the Energy and Power Industry 5 Source: Thomson Financial, Institute of Mergers, Acquisitions and Alliances (IMAA) analysis. Key Parties Involved in the Transaction Enel is Italy's largest power company and Europe's third largest listed utility by market capitalization Listed on the Milan and New York stock exchanges since 1999 Enel has the largest number of shareholders of any Italian company, at some 2.3m It has a market capitalization of about €50bn (as of April 2007) Total Installed Capacity: 40,475MW 2006A Revenues: €38,513m 2006A EBITDA: €8,019m 2006A EBIT: €5,819m 2006A Net Debt: €11,690m Acciona is one of the main Spanish corporations with activities in more than 30 countries throughout the five Continents Its activities span from infrastructures, renewable energy sources, mini-hydro, urban and environmental services, logistic and transportation, real estate, hospital management, among others Acciona is listed on the IBEX-35 (ANA.MC) selective index with a capitalization of €10.3bn (as of April 2007) Total Installed Capacity: 4,502MW 2006A Revenues: €6,272m 2006A EBITDA: €960m 2006A EBIT: €630m 2006A Net Debt: €1,085m 6 Key Parties Involved in the Transaction (Cont’d) E.ON is the world’s largest private power and gas company with over 30m customers in more than 20 European countries and the United States and a market cap of €68bn (as of December 2006) Since its incorporation in 2000, E.ON has focused in the energy and gas supply, having successfully developed new markets in the United States, the United Kingdom, Central and Eastern Europe and Scandinavia Total Installed Capacity: 28,172MW 2006A Revenues: €67,759m 2006A EBITDA: €11,353m 2006A EBIT: €8,150m 2006A Net Debt: €(268)m Gas Natural ranks as one of the biggest electricity operators in electricity generation and sale in Spain The main activities are: supply, distribution and sale of natural gas in Spain, France, Italy and Latin American (LATAM) countries 2006A Revenues: €10,348m 2006A EBITDA: €1,912m 2006A EBIT : €1,263m 2006A Net Debt: €3,091m Endesa is one of the largest electricity companies in the world The fifth utility in Europe and the biggest in Spain, one of the main players in LATAM countries and in Mediterranean countries, is also present in other energy sectors such as gas, cogeneration and renewables In total it has more than 22m of costumers worldwide Small investors make up for the majority of the shareholder structure, with free float being around 80% of total shares Total Installed Capacity: 47,113MW 2006A Revenues: €20,580m 2006A EBITDA: €7,139m 2006A EBIT: €5,239m 2006A Net Debt: €19,840m 7 Transaction Timeline 26 June 2 April Conclusion of the Enel and Acciona agree to transaction to sell sell €10bn of their assets 26 March operational assets in order for E.ON to Enel and Acciona agree to 19 July to E.ON. for withdraw its offer launch a joint takeover for Start of the acceptance €11.5bn the control of Endesa period for Endesa’s shareholders. Tender price is €40.16ps Gas Natural tender offer 2005 2006 2007 2008 2009 27 March The CNMV (Stock Exchange Regulator) gives 28 September The CNMV announces the final E.ON the possibility to E.ON. to result of the tender offer. Enel tender rise the offer price acquires 42.08% in Endesa offer (reaching a stake of 67.05%), and 11 April Acciona acquires the 3.97% of Enel and Acciona present Endesa shares (reaching a stake 27 February their tender offer to the of 25.01%) Enel acquires 9.99% of CNMV to acquire up to Endesa. 100% of Endesa at Between 1 and 12 March €41.3ps 25 June Enel enters in several Enel subscribes the equity swap contracts to acquisition of 25.01% of acquire up to 24.97% 4 June the Acciona stake in Enel reaches a stake of Endesa for a consideration 24.97% in Endesa through of €11.1bn the physical settlement of the equity swaps 8 Gas Natural Tender Offer Bidding Story: On 5 September 2005 Gas Natural launched an unsolicited offer for the entire share capital of Endesa for a consideration of €7.34 in cash and 0.569 shares of Gas Natural for each Endesa share (the “GasNat Offer”), valuing each share of Endesa at €21.3. This implied a 14.8% premium over the previous day close (based on the price of Gas Natural before announcement) and an offer value of €22.6bn In conjunction, Gas Natural announced it had reached an agreement with Iberdrola S.A. (“Iberdrola”) to transfer certain assets of the combined entity to Iberdrola, subject to the transaction being completed, (“the Iberdrola Agreement”). The objectives of the Iberdrola Agreement were to show proactiveness in relation to anti-trust issues and address part of the financing of the GasNat Offer On 21 April 2006, the Spanish Supreme Court also suspended GasNat Offer on the basis that the GasNat Offer could be illegal since it did not follow the recommendation from the TDC(1). Effectiveness of the suspension of GasNat Offer was conditional on Endesa making a deposit of €1,000m Strategic Rationale: Becoming a key integrated player in the electricity and gas sector in Spain and reinforce its position in LATAM countries Reaction: Endesa considered the offer unacceptable because not consistent with the fair value of Endesa Defensive tactic: sale of €3bn of non-strategic assets, proceeds distributed through extraordinary dividends 9 Note: (1) Competition Defence Tribunal E.ON Tender Offer Bidding Story: On 21 February 2006, E.ON publicly announced the launch of a counteroffer for Endesa offering €27.50 in cash per share, (the “E.ON Offer”) The E.ON Offer represented a 48.2% premium to Endesa’s undisturbed closing price on 2 September 2005 and a 24.5% premium to the nominal value of the GasNat Offer as of 24 February Endesa’s Board of Directors welcomed the fact that the E.ON Offer was superior in value to the GasNat Offer, but still believed that the price offered did not reflect the real value of Endesa On 27 September 2006, E.ON announced its commitment to increase the offer to €35ps, all in cash (“E.ON Second Offer”) On 2 April 2007 Acciona/Enel/E.ON reached an agreement to avoid a potential situation in which none of the parties would achieve any control of Endesa and the shareholder structure would result unsustainable in the medium to long term Following the agreement E.ON withdrew the offer Strategic Rationale: Exposure to markets where E.ON was not present such as Spain, where they would become the biggest player, and LATAM countries Reaction: The Spanish Government set a series of regulatory measures to contrast the acquisition of the biggest energy player by a foreign enterprise 10 Enel Acquisition of Endesa Transaction Description 11 Minority Stake Acquisition by Enel On 27 February 2007 Enel announced the acquisition of 9.99% of Endesa and in the following days entered into equity swap agreements (with the option of physical delivery) with MB and UBS as detailed below: On 4 June 2007 Enel reaches a 24.97% stake in Endesa through the settlement of the equity swap contracts Acciona’s stake in Endesa: 21.036% Enel + Acciona = 46.01% of Endesa 12 Source: Company Information Agreement between Enel and Acciona On 26 March 2007, Enel and Acciona signed an agreement to implement a joint management project for Endesa based on a ten-year agreement (renewable for other five years) Key elements of the agreement are: 1) Enel and Acciona to launch a tender offer 2) Creation of a NewCo to which Enel and Acciona would transfer stakes of 5.01% of Endesa each 3) Subsequent transfer of 40.00% of Endesa to the NewCo, which would be controlled 50.01% by Acciona 4) 20% free float replenishment Based on the joint agreement upon settlement of the tender, Acciona would increase its stake in Endesa to 25.02% (50.01% ownership of NewCo which holds a 50.02% stake in Endesa), and Enel would receive all the remaining shares 13 Agreement between Enel and Acciona (Cont’d) The agreement had a period of validity of 10 years with an extension option of 5 years Main Corporate Governance Rules Termination Clauses NewCo In case of a “deadlock” situation concerning “reserved matters”: Equal representation by both partners in the Board of Directors For the first 3 years, deadlock resolution would be solved through: Chairman appointed by Acciona Limited period of negotiations between Certain “reserved matters" require unanimous representatives of both parties consent The decision with less impact on the existing Endesa situation and business practices Acciona and Enel equally represented in the Board of After the third anniversary, deadlock resolution would Directors via NewCo be solved through: Chairman appointed by Acciona Asset split between the two parties CEO appointed by Enel Exercise of put option by Acciona to Enel Strategic, financial and operating decisions require the unanimous consent of both partners 14 Share Price Reaction during the Process 15 Source: Bloomberg.