Europeans at the gate

NEW YORK (CNNMoney.com) -- If you still pay your electric bill by post, it may be time to stock up on airmail envelopes.

With utility mergers in Europe already well underway, more and more utilities from the continent are eyeing the fragmented U.S. market for potential acquisitions.

Facing a consolidated home market, more and more European firms eye U.S. utilities.

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But with heavy regulation in the U.S., will these deals result in rising share prices at the combined company? And are electricity prices likely to rise as well? Also, what types of U.S. firms might make prime targets?

The Europeans have made several purchases of late.

In June the Spanish company Iberdrola said it was buying the Northeast utility Energy East Corp. in a $4.5 billion deal.

Last year England's National Grid agreed to pay $11.8 billion for New York's KeySpan.

And National Grid had already snapped up New England Electric Systems, the upstate New York utility Niagara Mohawk and Rhode Island's Eastern Utility Associates, among others, in previous deals.

"They gotta go where the growth opportunities are," said the U.S. head of a large European utility, who indicated his company was also looking to make some buys. "And the U.S market isn't nearly as consolidated."

But analysts say there's a reason there haven't been as many utility mergers in the United States as in Europe.

In Europe, utility rates are generally set for several years in advance, meaning companies can cut costs and boost profits even if rates stay the same, said Paul Fremont, an electric utility analyst at the investment bank Jefferies & Co.

In the U.S., regulators will often adjust rates every year, bringing them down if the company is saving money, Fremont said.

That makes profiting on an acquisition, whether through cost-cutting or other means, much more difficult.

"When you pay more than book value you're not allowed to earn on that premium," said Fremont, explaining that savings from a merger would likely be directed back to the public, not used to bolster the balance sheet of a company that just paid a premium for the stock of a rival.

When asked why the Europeans would be so interested in U.S. companies, he said, "It seems to me that they have a lot of cash and they need someplace to put it."

Another analyst also had a less-than-upbeat take on acquisitions in the industry.

"In my opinion, there's more value destruction created by M&A," said Mike Worms, a utility analyst at the investment banking firm BMO Capital Markets, pointing to the tough regulatory environment in the U.S. that makes it both difficult to charge higher prices and cut costs. "The regulators will ask for the money back as a concession."

Still, Fremont pointed to the Iberdrola deal as evidence that the Europeans seem undeterred.

Perhaps they are hoping the regulatory environment will change. Or, with surging U.S. electricity demand and looming greenhouse gas regulations, perhaps they're taking a more long-term view of the industry.

As Worms put it, "Prices are only going in one direction, and it's not south."

So which U.S. utilities might make likely targets?

Analysts say utilities not big enough to attract too much attention, but large enough to make a deal worthwhile, are good targets - say between $1 and $10 billion.

That's still a lot of companies, most U.S. utilities in fact.

But poorly performing companies usually make better targets. Eight utilities with a market cap of between $1 and $10 billion have seen their shares decline over the last 12 months.

Of those, one analyst said Ohio's DPL (Charts) and Kansas City-based Great Plains Energy (Charts) might be ripe for acquisition by a European firm.

Fremont said companies heavy in the transmission and distribution side of the business are attractive because they have predictable cash flows.

Worms said intra-state mergers might be easier because only one regulator would need to be dealt with. That could mean utilities in states where European firms already have a presence might be bought.

He also said to watch for companies with old chief executives, as negotiating a deal before retirement might be a nice capstone to a career, not to mention the potential compensation windfall.

As for consumers, analysts said electric prices are unlikely to change, as the rate is set by state regulators who don't really care who owns the company.

From an environmental perspective, they said to not expect any cleaner power plants from European utility owners, who have for years operated under sticker laws governing greenhouse gas emissions in Europe.

"U.S. companies are going to be just as sensitive as a foreign player," said Fremont. "You do what's necessary to comply with the rules in effect."