Two of the Netherlands' four largest energy companies said Thursday they have signed a merger agreement to form an energy giant worth 24 billion euros ($31 billion), but there were major questions about whether regulatory authorities would allow the deal to go forward.
Essent and Nuon said they signed a memorandum of understanding to merge, but the deal must be approved by regulatory authorities, as well as labor councils and the companies' shareholders, which include municipal, regional and national governments.
"An increase in scale is needed to ensure reliable energy delivery at acceptable costs and minimal environmental impact in the long term," they said.
The combined company would have sales of around 12 billion euros ($15.5 million), with 20,000 employees in the Netherlands, Germany and Belgium, serving 5 million customers.
Neither company has published results for 2006 yet, but Essent said its 2005 sales were 6.3 billion euros and Nuon said its sales were 5.0 billion euros. Both employ around 10,000.
Essent shareholders would hold 55% of the proposed EssentNuon, versus 45% for Nuon shareholders.
The companies said a deal would lead to annual cost savings and benefits of at least 300 million euros ($388 million) "achieved by considerable cost reductions in the area of purchasing, information technology and the elimination of double functions."
The companies said around 1,350 jobs would be lost.
"Of course, we're taking into consideration the possible conditions which the NMa (the Dutch energy market regulator) may impose on approval," the statement said.
In addition to the proposed company's size (it would make up roughly half of the Dutch electricity market) another major unresolved issue is its economic share in the national electricity grid.
Although the grid is managed by a separate company, TenneT, and open to competition from independent distribution companies, the Dutch government last year announced plans to split the network from generation companies outright.
Essent and Nuon lobbied intensely against the idea, warning they will be easy prey for German or French rivals as a result. They also admitted they may lose billions of euros (dollars) as a result because "cross border lease agreements" they quietly made with U.S. investors shortly after privatization in the late 1990s will have to be unwound.
Under those agreements, the companies sold their share of the grid to the American investors and then agreed to lease it back for a hundred years. The complicated transactions yielded a significant tax benefit to the U.S. investors, which they split with the Dutch companies.
A formal change of ownership of the network would mean the deals would have to be renegotiated, and the tax loophole was closed by the Bush administration in 2004.
Depending on the exact terms of the agreements, which are not public information, the Dutch companies may be liable when the expected proceeds of the tax dodge disappear.
"Essent and Nuon will create an independent net management arm in our new company," they said in their statement. "The relationship between the network and the commercial (generation) part of the new company won't be open to criticism in any way."
It is yet not clear whether the incoming centrist government - still in a coalition-building phase - will carry out the previous conservative's government plans for further market liberalization.