Nov 29 - Business Week

It's no coincidence the Web site of Spanish electric utility Iberdrola is awash with the color green. From wind farms across the Iberian Peninsula to consulting on an ambitious wind-farm project in northern China to a tidal marine project off Spain's north coast, Iberdrola is betting on renewable energy to power its own future.

The Madrid-based utility took its biggest -- and most expensive -- step in that direction on Nov. 28 with a $22 billion cash-and-stock bid for Scottish Power (SPI), Britain's fifth-largest electricity generator. The deal would give Iberdrola the kind of bulk it seeks to avoid takeover from European counterparts in a sector destined for consolidation. It also marks the rise of a clear global No. 1 in terms of "green" power generation, the move from fossil fuels toward electricity derived from wind and waves.

Europe is boosting its shift toward renewable power sources and most observers expect a similar transition elsewhere -- especially in the U.S., the world's largest energy consumer. Iberdrola already claims the title of largest wind-energy company with a goal of reaching 10,000 MW of wind-energy generation by 2011, much of which will be outside Spain, where it has invested heavily in countryside wind farms. Along with its growing presence in the U.S. market, Iberdrola has facilities set up and/or projects under way in Greece, Italy, Britain, France, Portugal, Germany, Poland, Mexico, and Brazil.

Going the Renewables Route Scottish Power is also heavily skewed toward the green camp, developing the world's largest offshore wind farm just south of Glasgow.

The Scottish Power deal "shows [Iberdrola] wants to be in charge of its own destiny and is not waiting meekly to be led into a domestic merger or international deal," says Paul Rogers, a Merrill Lynch analyst in London.

An important part of that destiny is renewable energy. Iberdrola has invested nearly $4 billion since 2001 in renewables, with about 10% of its energy now coming from wind. In 1976, it helped found wind-energy park builder and aeronautics firm Gamesa, of which it now owns about one-quarter. One of Gamesa's original founders is Iberdrola's largest individual shareholder and Executive Vice-President, Juan Luis Arregui.

Expansion in the U.S. To reach its goals in renewable energy, Iberdrola has its sights set on markets where demand for renewable energy is expected to grow, like the U.S., where some analysts estimate double-digit increases due to preoccupation over energy self-sufficiency and the renewable portfolio standards many states are implementing. And that doesn't even include the business attraction from the market's sheer size.

Iberdrola started its U.S. expansion earlier this year with its purchase of Community Energy of Pennsylvania, followed by Joice [Iowa]-based Midwest Renewable Energy a few months later. It says it plans further U.S. acquisitions. Iberdrola hopes to surpass its goal of 1,000 MW by 2009 in the U.S. market, which the company sees as having strong growth prospects.

"The small producers that have been instrumental in developing the wind-energy sector in countries like Spain have not been active in the U.S.," Martin Mugica, president of Iberdrola Energia Renovable USA, said in a telephone interview on Nov. 28. Small U.S. producers can't take advantage of federal tax credits intended for larger firms.

Another Consolidation Conquistador? Talks with Scottish Power began on Nov. 10, with analysts expecting the Glasgow company would accept an offer. Scottish Power rejected a lower per-share offer last year from German utility E.On. In March, 2005, the company closed the sale of its U.S. operations, PacifiCorp, to Warren Buffett's Berkshire Hathaway.

One buyer in the move toward consolidation is expected to be Spanish construction heavyweight ACS, which surprised markets late last month when it snapped up 10% of Iberdrola. ACS is also the largest holder in Union Fenosa, a rival Spanish utility.

Scottish Power's U.S.-traded shares were down 2 cents to $57.58 on Nov. 28 on the New York Stock Exchange. Iberdrola shares fell 2.1% to 32 [$42.02] on the Madrid bourse, but analysts said the fall does not augur a continued slide. "The operation is neutral in terms of share value and operational value," says Antonio Lopez, head of research at Fortis Bank in Madrid. "I don't expect the negative effect on share price to last." His target price for Iberdrola is 35.75 per share.