The expected rejection by Endesa of its smaller rival's offer sets the scene for confrontation in the Spanish energy market

Spanish Endesa has rejected an unsolicited Gas Natural bid of nearly €22.55 billion, saying the offer under-valued the power group.

Gas Natural launched the shock unsolicited takeover bid for power giant Endesa which, if successful, would create one of the largest energy companies in Europe and the third largest utility in the world with more than 30 million customer accounts worldwide.

The public offer for 100% of the share capital of Endesa implies a total value of €22,549 million, or €21.30 per share, a figure which represents a premium of 19.4% to Endesa’s average share price over the last six months.

The cash and shares offer would see close to 35% of the equity bought for cash.

Gas Natural hopes to use its plentiful supply of natural gas to power Endesa generation units giving it a profitable and growing outlet for its gas, while enabling Endesa to secure a ready and cheap supply of gas.

The takeover attempt may mark the beginning of a long-awaited consolidation in the Spanish energy sector after years of false starts with competition authorities effectively scuppering deals by ordering the disposal of major assets in order to approve such mergers.

Analysts suggest this deal may have a better chance of success with the government keen to promote a national champion big enough to compete in the wider European arena and a preliminary asset disposal deal already arranged with Iberdrola following the acquisition of Endesa.

Gas Natural added that the merged group would invest up to €17 billion over 2006-2009 period including having 8,400 MW of gas-fired combined cycle capacity and 4,000 MW of renewables by 2009.

Gas Natural expects the bid process to conclude next spring and will require 75% shareholder approval.

Endesa’s board advised shareholders against accepting the offer from the smaller gas company, saying it has been presented in a hostile way.

Endesa also says that the structure of the offer introduced elements of uncertainty rendering it impossible to determine the real value of the offered price. In any case, Endesa adds, a first evaluation determines that the economic terms of the offer are clearly insufficient and do not reflect by any means the fair value of the company.

The Endesa board has reportedly appointed investment banks J.P. Morgan Chase, Deutsche Bank and Citigroup to help develop its takeover defence.