German Electricity company E.on has launched a £5 billion takeover bid for Powergen, Britain’s second largest power generator.

The Düsseldorf-based company has offered 765p in cash for each Powergen share, 35.2 per cent more than Powergen’s average share price over the last six months. E.on will also assume Powergen’s debt, placing an enterprise value of £9.6 billion on the company.

The deal, the biggest cross-border purchase to date in the European utilities industry, will create a company with 30 million electricity and gas customers. It will also give E.on a considerable position in the US energy market through LG&E Energy, the Kentucky-based electricity group acquired by Powergen last year in a deal worth £3.6 billion.

Under the terms of the agreement, which is subject to clearance from the regulators in the US and Europe, Powergen will operate as a separate subsidiary of E.on, running and developing the company’s British and US businesses. E.on’s Chairman and co-chief executive, Ulrich Hartmann, will become chairman of Powergen’s board, with present chief executive Powergen’s Nick Baldwin continuing in that role.

  “The acquisition of Powergen is one major step – but certainly not the last one – in the growth strategy that we are pursuing in the energy sector, our core business area,” said Hartmann. “Our successful strategy of focus and growth is now entering a new phase in which we will fully concentrate on the energy service business, which we intend to steer to a new growth dimension.” Following the unveiling of the bid, E.on announced it plans to sell its Degussa chemical division, as US regulations bar groups that generate less than 80 percent of their sales from electricity and gas supply from owning US energy companies. To comply with the regulations, E.on will also sell its real estate activities, a move expected to aid in the company’s aim to close the Powergen transaction by Spring 2002.

E.on, formed in 1999 by the merger of the electricity interests of Veba and Viag, was advised by Goldman Sachs and Rothschild, and Powergen by Dresdner Kleinwort Wasserstein and UBS Warburg.

Meanwhile Powergen has made public its ambitions to move into the management of power stations on mainland Europe in a big way. It aims to have 8000 MW of such power stations under its management within five years, a similar figure to its current capacity in England and Wales. Ceo Nick Baldwin commented that the company would initially be targeting 150 000 MW of coal fired plant that was at least ten years old – an area in which PowerGen has had a lot of operational experience.