Mature Response to Natural Keenness: LEX COLUMN - Endesa/Gas Natural.

NEW YORK -- The following is an article from the Lex Column issued yesterday in the Financial Times, European Edition (page 16).

Endesa (NYSE: ELE) has taken a magisterial 27 days to defend itself from a hostile Euros 22.5bn bid from Gas Natural, its smaller rival. The content and the timing of its response are mature. It has not whinged about political interference. Catalonia's political establishment, backing Gas Natural, may want to play God. Endesa's owners, 45 per cent foreigners, adhere to the gospel of price.

Endesa has some strong arguments. The premium to the undisturbed price is a low 15 per cent. Gas Natural shareholder Repsol would own 13 per cent of the combined entity. It recently said it would sell down, creating an overhang. La Caixa, an unquoted Catalan bank with a political mandate, would have 15 per cent. Critically, the low Euros 7.8bn cash component would be financed by selling Euros 7bn-Euros 9bn of Endesa assets, mainly to rival Iberdrola. Since the price for this is unknown, it is impossible to evaluate the true worth of the offer.

Strategically, it is unclear what the benefit of integrating gas distribution and Endesa's power business is, beyond a simple diversification effect. Adding Gas Natural's Euros 14bn enterprise value to Endesa's Euros 48bn EV should create synergies. However, logically, selling Euros 7bn-Euros 9bn of Endesa assets should have the opposite effect.

Endesa has committed itself to return Euros 7bn in cash over five years and raised its long-term guidance to hysterical levels. But its main weapon is that the offer is not convincing. Gas Natural is keen, but in a hostile, share-financed reverse takeover, enthusiasm is not enough.