The ACCC announced that it will not block the proposed acquisition of Macquarie Generation by ERM Power Ltd (ASX: EPW). The Macquarie Generation business contains the NSW public assets of the Bayswater and Liddell power stations, which supplied 30% of the state's electricity needs in 2012.
ERM Power is the fourth largest buyer and seller of electricity in Australia, but the ACCC deemed that it would not "substantially reduce the competitiveness of generators or retailers or otherwise raise barriers to entry in the relevant electricity markets."
This was based on the relatively small retail base the company has and the fact that its current generating assets are limited to the extent that even with the potential asset sales, competitive tension would be preserved.
Final bids are expected by 5 February, and AGL Energy Ltd (ASX: AGK) is also in the running for the auction.
ERM Power has three business segments covering electricity sales, generation, and gas. For its gas, it has exploration tenements in WA, and in NSW it has interests in conventional and coal-seam gas exploration prospects.
After listing on the ASX in late 2010, NPAT has risen from $16.2 million to $42.77 million and revenue has climbed almost threefold. It targets providing large and small businesses with electricity, and has two gas-fired power stations in Oakey, QLD, and Neerabup, WA, so adding the NSW power stations will give it a wider national footprint.
Investors should look over other power generation companies like AGL Energy, the largest utilities company listed on the ASX, and Mighty River Power Ltd. (ASX: MYT) to understand the power generation industry's strengths and weaknesses for an accurate comparison.
The company's share price is $2.56 and it has a PE of 11 and a dividend yield of 4.10%.
Foolish takeaway
Electrical infrastructure can be very expensive to invest in, and the barriers to entry like government licensing and approvals make the industry difficult for new comers, but it is not impossible. Once a company establishes itself, it may be a regulated monopoly or have monopolistic features that make for stable earnings in the long-term.
