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Scot Power agrees $22B Spanish bid

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LONDON, England (Reuters) -- Spain's Iberdrola has agreed to buy Scottish Power for £11.6 billion ($22.5 billion) in cash and shares to create Europe's third-biggest utility and a world leader in renewable energy.

Iberdrola, Spain's second-largest utility, said on Tuesday it would pay 400 pence in cash and 0.1646 new shares for each Scottish Power share, worth a total of 777p a share at Monday's close. The price includes Scottish Power's 12p special dividend.

The value of the long-awaited bid is below the widely expected 800p a share, and at 1140 GMT Scottish Power shares were down 0.5 percent at 743p. Iberdrola was down 2.4 percent at 32 euros, while the DJ Stoxx European utilities index was down 0.5 percent.

"The mix of cash and Iberdrola shares will not appeal to all investors, but we do not see this as an insurmountable obstacle," said Jim Stride, head of UK equities at AXA Investment Managers, which owns 2 percent of Scottish Power.

Some analysts said the deal could leave room for a rival bid, as Scottish Power investors might be persuaded by a lower offer if it was all in cash. Germany's RWE and Sweden's Vattenfall have been tipped as possible rival suitors.

But Exane BNP analyst Jose Javier Ruiz Fernandez said Iberdrola was paying a price broadly in line with recent sector deals and saw little prospect of a counter-offer.

"I think it is a good move (by Iberdrola)," he said. "They're paying the sector average, it's slightly value creative and it's a new platform of growth, especially in renewables."

Ruiz Fernandez said the price Iberdrola was paying put Scottish Power's enterprise value at 12.2 times its forecast earnings before interest and tax (EBIT) for 2007, in line with the European utilities sector average of 12.3 and with German group E.ON's recent bid for Spain's Endesa.

Europe's utilities are consolidating as governments ease takeover rules and firms are bolstered by high energy prices and cost cuts. Scottish Power, Britain's fifth-largest energy supplier, has long been viewed as a target for larger rivals. Last year it rejected a 570-pence-a-share offer from E.ON.

After buying Scottish Power, Iberdrola will trail only France's EDF and E.ON among Europe's biggest utilities.

The deal comes amid some recent speculation in the market that Iberdrola's biggest investor, Spanish builder ACS, favored merging it with domestic rival Union Fenosa, in which ACS has accumulated a stake of over 40 percent.


"The new company will be a leader in the energy sector, with a more balanced business portfolio and at the head of the global windpower sector," Iberdrola's Chairman and Chief Executive Ignacio Galan told reporters on a conference call.

Iberdrola said it would fund the deal with credit worth up to 7.96 billion pounds backed by ABN AMRO, Barclays and Royal Bank of Scotland. The equity part of the deal equates to 21.4 percent of its enlarged share capital.

Iberdrola said it also planned to sell off over 1 billion euros ($1.3 billion) of its assets within a year of completion.

The deal will immediately boost its earnings and generate at least 88 million pounds in annual pretax operating cost savings and average annual capital spending savings of 30 million pounds, the Spanish firm said.

Iberdrola's head of strategy Jose Luis del Valle said that, based on analysts' forecasts, the combined group would increase net profit from a proforma 2.1 billion euros in 2005 by an average of 14 percent a year until 2009. Iberdrola also said the deal would not change its dividend commitments.

In the credit derivatives market the cost of insuring Scottish Power's debt against default fell on the prospect of its acquisition by the more creditworthy Iberdrola.

Five-year credit default swaps on Scottish Power fell 3 basis points to 21.5 basis points, and those on Iberdrola fell 1.5 basis points to 20 basis points, a trader in London said, meaning it costs 21,500 euros a year to insure 10 million euros of Scottish Power's debt against default.

Spain's companies are flush with cash, fuelled by a decade of economic growth and cheap financing due to the introduction of the euro. Its tax laws also give firms a break on foreign-acquired goodwill, encouraging overseas purchases.

This has led to a string of deals in Britain, one of the world's most open markets for takeovers, including construction firm Ferrovial's purchase of Heathrow airport owner BAA and Telefonica's purchase of mobile telecoms firm O2.

Iberdrola is being advised by ABN AMRO, while Morgan Stanley is acting for Scottish Power.

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Scottish Power's 97 mega watt Black Law wind farm with 42 generators is the UK's largest.

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