Energy mergers: Synergy will exceed combined revenues

On June 30, Latvenergo and Eesti Energia submitted to Latvian and
Estonian economics ministries their plans for future cooperation,
expected to end in a merger. Uniting the efforts of two Baltic energy
companies and giving each a broader potential customer base to work
with seems to be a good idea. It also harmonizes very nicely with the
spirit of the time, i.e. the globalization and merger frenzy which
has already spilled into Europe from the United States.

However, the prospects of a merger between energy exporting Eesti
Energia and Latvenergo, which works almost exclusively in the
domestic market, begin to raise questions on the Latvian side as to
who will benefit from the possible merger. The first inkling of
skepticism likely to come when public attention turns from the issue
of privatization to that of the merger came from the director of
Latvian Economics Institute Raita Karnite, who suggested in an
interview with the Latvian Television that Estonia will gain more in
the proposed deal.

In the short run, it may well be true. The main short-term benefits
of the merger, or close cooperation preceding it, lie in the expanded
market which will become available to both suppliers. Eesti Energia
is indeed in a better position to exploit these benefits, as its
production volumes exceed the needs of the internal market, and
almost 10 percent of its total generated energy is exported.

But although in the short run Eesti Energia may experience greater
benefits from cooperation with Latvenergo, the long-run effects of
the future merger will reach beyond simple revenue increase because
of market expansion and concern both companies to an equal degree.
Increased revenue, combined with possible savings because of the
merger of two administrative apparatuses, will allow both companies
to fund more investment projects aimed at faster innovation and
increase in production efficiency. With close cooperation between the
two companies, part of energy generation could also be outsourced to
the partner, should one of the companies need to temporarily reduce
production while carrying out renovation activities.

Apart from the growth of internal funds, the merger is likely to
attract a greater number of strategic investors to a bigger company.
Eesti Energia has already interested Finnish Imatran Voima and
American NRG. Latvenergo, as a close partner of a company which is
evidently considered a good investment, is likely to get more foreign
interest than it could attract on its own.

There is also little doubt that a combined Latvenergo and Eesti
Energia will have a better chance of withstanding European
competition, once the electricity market opens according to the EC
directive of 1996, as well as give it a better competitive position
among Scandinavian energy generators within the Baltic Sea network.

Cooperation between the Estonian and Latvian energy companies will
lead also to the development of necessary legislation and
transmission system, which will not be wasted once the Baltic states
become part of Europe, and, perhaps in a nearer future, of the Baltic
Sea energy network.

In the long run, the closer the ties between the Baltic states'
energy sectors, the better not only for the Baltic states, but also
for their Scandinavian and East European neighbors. According to the
research on the Baltic Sea energy market presented to the Nordic
Council of Ministers last year, energy sectors in the Baltic states
and Eastern Europe are not only inefficient, but also environmentally
harmful, a result of an abundance of energy resources and extremely
low priority placed on environmental safety in Soviet times.

The Baltic states' primary energy sources are different (hydropower
in Latvia, peat in Estonia), and cooperation will help ensure a
secure energy supply for the region without the creation of excessive
capacity in any of the countries - a strategy which will lighten the
load on the Baltic Sea environment. In this respect Lithuania, with
its primary reliance on nuclear power, will also be a desirable
member of the club.

Even if Latvenergo doesn't benefit as much as Eesti Energia in the
short run, it is also unlikely to lose out. And long-term benefits,
both in economy and the environment, are worth the wait.