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---------------------- Forwarded by James Derrick/Corp/Enron on 12/01/2000 03:19 PM --------------------------- "Dilg, Joe" <jdilg@velaw.com< on 12/01/2000 02:52:55 PM To: "Derrick, James (Enron)" <james.derrick@enron.com< cc: Subject: FW: Rumors of Eni / Enron Merger Abound, Despite Denials from Eni Diamond, enjoyed lunch. Here is the rest of the e-mail. Joe -----Original Message----- From: IssueAlert [mailto:IssueAlert@scientech.com] Sent: Friday, December 01, 2000 5:17 AM Subject: Rumors of Eni / Enron Merger Abound, Despite Denials from Eni http://www.consultrci.com ********************************************************************* Find out more about SCIENTECH'S most popular competitive tools, including the Mergers and Acquisitions and E-Commerce InfoGrids at: http://www.consultrci.com or call Chris Vigil (505) 244-7605 ********************************************************************* Reach thousands of utility analysts and decision makers every day. Your company can schedule a sponsorship of IssueAlert by contacting Nancy Spring at nspring@scientech.com or (505)244-7613. Advertising opportunities are also available on our website. ********************************************************************* =============================================================== SCIENTECH IssueAlert, December 1, 2000 Rumors of Eni / Enron Merger Abound, Despite Denials from Eni By: Will McNamara, Director, Electric Industry Analysis =============================================================== Eni, the Italian oil and gas group, is expected to complete the sale of its Italian property interests next week as part of its strategy to focus on its core activities of natural-gas and oil production. Vittorio Mincato, Eni's chief executive, confirmed that the group is on the verge of finalizing the sale of its Immobiliare Metanopoli property subsidiary (Eni's real estate company) with assets valued between $856 million and $1.3 billion. Eni's decision to divest its property assets has been viewed by many observers of the company as an attempt to release funds to facilitate a merger with another company. Enron Corp. has been among those on a rumored short list of merger prospects for Eni. ANALYSIS: Is the foundation being established for a mega-merger between Eni and Enron? It is not too difficult to formulate a theoretical argument in that direction. Eni is Italy's state-owned, multi-faceted energy company, operating in the oil and gas, power generation, petrochemicals, oilfield services, and engineering industries. The company has a market capitalization of about 47 billion euros (approximately $40 billion), is present in over 70 countries and produces more than one million barrels of oil equivalent a day. Across the European energy market-which once it has fully privatized will represent an arguably larger market than the United States-Eni is unquestionably one of the Continent's leading champions. Illustrating this point, Eni has taken several important steps within Europe to, as it says, "play an increasingly important role" in the Continent's competitive energy market. For instance, earlier this month, Eni inked a deal to sell 2 billion cubic meters of natural gas to Gaz de France. This deal followed a previous agreement in which Eni agreed to sell 4 billion cubic meters of natural gas to Italy's largest private energy supplier, Edison. With both agreements, Eni has given a substantial kick start to the opening of the European natural-gas market. CEO Mincato has said that Eni would recoup the losses made by giving up its market hold in Italy by "focusing on international markets." One move that Eni has made outside of Europe also came earlier this month. Eni made a bid for Australia's Petroz NL, which wields an 8.25 percent stake in Bayu-Undan, the giant gas and liquids project located off the northern coast of Australia. Eni already owns 6.7 percent of Bayu-Undan and apparently is attempting to gain a majority ownership over the project. It is no wonder why-the Bayu-Undan field has recoverable reserves of 400 million barrels of liquefied petroleum gas and gas reserves of 3.4 trillion cubic feet. Petroz has not yet accepted Eni's offer, but a favorable decision is expected shortly. Thus, whatever Eni may be divesting in Italy it is trying to regain in other key areas of the world. In fact, Mincato recently confirmed that Eni plans to increase its daily output of oil from a current level of 1.2 million barrels to 1.5 million barrels by 2003. Moreover, Eni has been making aggressive attempts at expansion, both within Europe and beyond. Along with that expansion comes the development of merger strategy. Eni does not want to be left as a target for a takeover, which could be a strong possibility given its recent divestitures and the fact that its profits remain strong. Net income for the company for the first half of 2000 was 2,606 millions of euros (equivalent to approximately $2.2 billion), representing a 119-percent increase. Eni is largely considered one of the best buys among the big oil stocks, but it would rather merge with an equal partner than be sold to another company. As consolidation of the oil industry continues, Eni reportedly believes that the only way to remain a top player is to marry an equally large player on the world stage. Enron may be at the top of Eni's list of merger partners. Negotiations with Spain's largest oil company, Repsol, appear to have stalled, as was confirmed when Mincato stated that any "link-up with Repsol would not be a merger of equals." French oil company TotalFina is also interested, but is preoccupied with its own acquisition of fellow French oil company Elf. Other companies that have been mentioned include Conoco and Phillips Petroleum. It is quite obvious that Eni's merger prospects are predominantly oil companies, which is quite clearly the company's intention. Thus, it may seem odd that Enron is also included as a top prospect. Enron, while unquestionably a world player, is known for its unorthodox approach to hard assets. Put succinctly, Enron believes that it doesn't need to own physical assets in order to be a major player, but rather it only needs to rely on strategic contractual agreements. However, if Eni wants to continue to expand globally, it arguably could not find a better partner than Enron, generally considered North America's biggest buyer and seller of electricity and natural gas. Enron's gas trading and distribution activities in particular-along with its electricity production, raw material trading and broadband expansion-would all appear to be good compliments to Eni's portfolio. Reports of talks between the two companies first appeared in the Italian financial paper iL Sole 24 Ore, based on input from an unnamed source. The report indicated that Enron is being targeted by Eni for an equity partnership or even a full merger. Mincato, as recently as Tuesday of this week, continues to adamantly deny that any deal with Enron is being studied. Not surprisingly, Enron is remaining mum on the rumors and has not even mentioned Eni in any recent disclosures. However, the incorporation of Eni's power production portfolio would support Enron's expansion into new markets such as Japan, for example. Back in March, the Japanese government began allowing non-utility firms to supply power to industrial and commercial end-users. Almost simultaneously, Enron established a new subsidiary, Enron Japan Corp., to capitalize on new opportunities in the country. Enron Japan's first offer is a 10-percent discount off current electricity prices for customers who sign on with Enron for two to four years. Operating against its North American strategy, Enron also plans to build a power station in northern Japan, beating to the punch several of its key rivals, including Vivendi, Texaco and Royal Dutch Shell, which also have expressed interest in establishing operations in the country. Enron's proposed power plant should give the company prime access to companies in the Tohoku and Kanto regions, as well as Tokyo, the "big catch" of the Japanese market. In my opinion, herein lies the primary synergy that would make the partnership between Eni and Enron a strategic step for both companies. As Eni attempts to position itself in various key markets, Japan seems like a natural location, and I've seen no reports that indicate Eni is moving into Japan on its own. The fact that Enron is already there, along with most other lucrative international markets, must certainly be appealing to Eni. Regarding Enron's perspective on any potential partnering, Eni's substantial oil and natural-gas generation assets, along with its current lock on the European market, must be very attractive. Enron's current market capitalization is about $48 billion, which actually makes it larger than Eni. This raises the question of which company would be the buying partner if a merger were to indeed take place. All of the rumors flying around currently speak of Eni pursuing Enron, but it could just as easily be the other way around. Those of us who follow Enron closely may find it hard to believe that the powerhouse company would ever be the target for a takeover or even a merger. In any case, the rumors continue to fly as Eni responds to claims of "thou doth protest too much." Whether or not any such merger between Eni and Enron, which appears smart on paper, will materialize remains to be seen. However, it certainly seems like Eni is lining up its chess pieces to cement some kind of partnership in the very near future. ============================================================== SCIENTECH can help you find the answers you need. From simple questions to complex problems, our experts and consultants will get results. Learn more about our six service areas at: http://www.consultrci.com/web/rciweb.nsf/Web+Pages/About_RCI.html ============================================================== SCIENTECH is pleased to provide you with your free, daily IssueAlert. Let us know if we can help you with in-depth analyses or any other SCIENTECH information products. If you would like to refer a colleague to receive our free, daily IssueAlerts, please reply to this email and include their full name and email address or register directly at: http://www.consultrci.com/web/infostore.nsf/Products/IssueAlert Sincerely, Will McNamara Director, Electric Industry Analysis wmcnamara@scientech.com =============================================================== Feedback regarding SCIENTECH's IssueAlert should be sent to wmcnamara@scientech.com =============================================================== SCIENTECH's IssueAlerts are compiled based on independent analysis by SCIENTECH consultants. The opinions expressed in SCIENTECH's IssueAlerts are not intended to predict financial performance of companies discussed or to be the basis for investment decisions of any kind. 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