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Iberdrola Loses Edge to Top Investor as Law ‘Stirs Up Beans’

Ignacio Galan, chairman of Iberdrola SA. Photographer: Chris Ratcliffe/Bloomberg
Ignacio Galan, chairman of Iberdrola SA. Photographer: Chris Ratcliffe/Bloomberg

June 30 (Bloomberg) -- Chairman Ignacio Galan of Iberdrola SA, the world’s biggest producer of renewable energy, has battled for five years to limit the influence of his largest investor. Galan is about to lose one of his best tools.

Tomorrow, stockholder Actividades de Construccion & Servicios SA will gain the right to vote all of its 20 percent stake in Iberdrola. Previously, domestic law allowed Iberdrola to limit ACS’s voting rights at 10 percent.

Spain is ending voting caps for companies that use them, including oil driller Repsol YPF SA, to avoid entrenching management. While the change will increase the power of ACS Chairman Florentino Perez, a self-made billionaire and chairman of the Real Madrid soccer club, it may backfire for investors.

“This is going to really stir up the beans,” said Miguel Llorente, who owns Iberdrola shares and helps run 3.8 billion euros ($5.5 billion) at Capital at Work in Madrid. “ACS is going to be pressing for a takeover, and the speculation is not going to be to the benefit of shareholders” of Iberdrola.

Galan has denied Perez board seats. Perez, in turn, hasn’t disclosed his agenda for the Bilbao-based power company whose 35 billion-euro market value is bigger than that of any U.S. utility. An ACS spokesman declined to comment.

ACS shares have gained 8.2 percent this week. That beat the 4.6 percent increase in the 19-member Bloomberg Europe Construction & Engineering index and the 4.1 percent advance by Iberdrola in the same period.

That helped Perez hold his long-term lead: ACS averaged a total return of about 4.9 percent annually in the last five years compared with Galan’s 1.9 percent, Bloomberg data show.

Hostile Hochtief Offer

The 64-year-old Perez, as head of Europe’s largest construction company, is experienced in boardroom battles and acquisitions. This month he completed an unsolicited takeover of a bigger rival, Germany’s Hochtief AG.

First, ACS made an all-share hostile offer to Hochtief investors in September that was below the target’s market price. That allowed the Spanish builder to increase its 30 percent stake by buying shares in the market until it surpassed the 50 percent threshold.

Perez invested in Iberdrola while also doing his own renewable-energy projects, diversifying the Madrid-based builder from public works after Spanish government spending plummeted and the economic boom turned to bust in the past three years.

Investors who support Galan say they aren’t sure that a stronger Perez will increase shareholder value.

Urge to Bid?

Ingo Speich, who manages 3.5 billion euros at Union Investment GmbH in Frankfurt, said he’s concerned Galan may make a profit-diluting takeover to keep Perez at bay.

“Sometimes there’s a likelihood that even if the management of the company is excellent, they take short-term-oriented actions that could be negative in the long run,” Speich said. Galan already has made two “questionable” deals as ACS sought to build its influence, the fund manager said.

Since ACS bought a 10 percent stake in 2006, Iberdrola bought back its own renewable-energy unit and acquired the U.K.’s Scottish Power Plc electricity company for cash and stock, diluting ACS’s stake. Speich said little value was generated for shareholders by the purchases which, according to Bloomberg data, cost $29 billion including debt.

At Iberdrola’s annual meeting on May 27, Speich voted with a minority of stockholders against a resolution that granted Galan authority to increase share capital by as much as 50 percent. Speich said he owns about 160 million euros of Iberdrola stock.

Galan’s Remarks

Galan told shareholders at the meeting that buying companies including Scottish Power and Energy East Corp. of the U.S. had protected Iberdrola from the financial crisis and allowed it to post a record profit last year. Galan told analysts on May 5 the company has no plans for further deals.

A spokesman for Iberdrola declined to comment further.

Perez’s strategy may be to force Iberdrola to sell assets, said Carles Vergara, a professor of finance at Iese business school in Barcelona. That would earn a dividend for ACS and make it easier to amass a controlling stake in the power company.

ACS, with less than a third of Iberdrola’s market value, won’t be able to take control without recruiting allies that also have large stakes, he said.

Cash Flow

Officials at Bilbao Bizkaia Kutxa, the Spanish savings bank that owns 6.2 percent of Iberdrola, according to Bloomberg data, wouldn’t comment, a BBK spokesman said.

Speich said he’s backing Galan to come out on top because Perez may want to use the power company’s cash flow to reduce ACS’s debt.

The construction company controls 20 percent of Iberdrola’s shares through a combination of direct holdings and swap contracts.

Galan has said ACS is a competitor and barred it from the board of Iberdrola, whose renewable-energy unit produced a record 25,400 gigawatt-hours of electricity last year.

ACS responded by putting its clean-energy portfolio up for sale and sued for board seats all the way to Spain’s Supreme Court, which hasn’t ruled.

“ACS is in no position to launch a takeover,” said Llorente. The builder “is waiting for Galan to make a mistake. They are going to wait for the best moment to play their card.”

To contact the reporter on this story: Ben Sills in Madrid at

To contact the editor responsible for this story: Reed Landberg at

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