Vattenfall is continuing its expansion into a Europe-wide utility by acquiring Dutch utility Nuon.

The state-owned Swedish utility is to buy the production and supply business of Nuon, which supplies more than 3 million customers in the Netherlands, Germany and Belgium. Nuon’s power grid will remain in the hands of the local and regional governments that currently own the company.

Vattenfall has made an all-cash offer of EUR8.5 billion for Nuon and says that the move will help it to achieve its goal of attaining a climate-neutral operation by 2050. Vattenfall will initially purchase 49% of Nuon’s shares and purchase the remaining 51 per cent over the next six years.

The agreement will create a “leading European energy company”, according to the two companies, and follows RWE’s recent announcement that it is to takeover Nuon’s Dutch rival Essent. Vattenfall had been interested in acquiring Essent.

Nuon will become Vattenfall’s third regional business unit, responsible for driving growth in the Benelux region and taking a leading role in the development of gas activities. The combined company will be Europe’s leading offshore wind energy company.

“I’m very pleased to say that in Vattenfall, Nuon has found a partner that enables the company to continue pursuing the current strategy and realise our objectives,” said Øystein Løseth, CEO of Nuon. “Our partnership will boost Nuon’s investment programme for new, cleaner production and innovative energy technologies for our customers.”

Essent and Nuon have both been seeking European partners since their failed attempt to merge with each other in 2007. A recent Dutch law also requires them to separate their regulated and unregulated businesses by 2011.

Vattenfall says that Nuon’s breadth of knowledge in renewables and clean energy technologies is a valuable addition to its business. The combined group will accelerate investments in carbon capture and storage (CCS) projects such as Nuon’s installation at Buggenum and Vattenfall’s Oxyfuel demonstration at Schwarzepumpe in Germany.

Offshore investments will also be a key focus of the combined group, which will target an annual production of 15 TWh of wind power by 2015.

“The partnership … enables us to further implement our strategy towards a leading position in the European energy market and enhance our position in gas,” said Lars G. Josefsson, CEO of Vattenfall. “The Benelux market is highly complementary to our existing European activities. Our combined strengths make us an independent and competitive player.”

The deal requires approval from Nuon shareholders as well as European competition authorities. Vattenfall expects to close the transaction by the end of Q2 2009.