Construction giant invested heavily in electricity company in 2010 to gain board representation

Florentino Pérez has kept his promise. The president of ACS said he would move to obtain a 20-plus percent stake in Iberdrola, and so it has come to pass. After buying stock in the energy company throughout the week, the construction giant now controls slightly more than that amount, reliable market sources have confirmed. In all, ACS has invested around 2.6 billion euros in Iberdrola shares throughout 2010.

Now that a new year is underway, ACS will try to use its power to obtain representation on the electricity company's board of directors. Until now, Iberdrola has vetoed that presence despite the fact that the construction company is its main shareholder.

After its recent round of buying, ACS's stake is now larger than the sum of all Iberdrola board members' shares (0.3 percent) combined with those of all the shareholders represented on the board (BBK with 6.8 percent; Bancaja with 5.7 percent and Unicaja with 1.5 percent) and all the other members of the stable group of shareholders (Caja Murcia, Sánchez-Ramade, Sodena, Caja Duero, CCM, Caja Burgos, Caja España, Caja Segovia, Caja Vital, Caja de Ávila and Caja Extremadura), which together represented 4.2 percent of Iberdrola, according to the latest figures received by the CNMV, the stock market watchdog.

Even if all of these shareholders were joined by Juan Luis Arregui, a former board member who still holds a one-percent stake in the electricity company, they still would not equal the 20.2 percent stake now in the hands of ACS.

At the same time, this increase has allowed ACS to considerably reduce the average cost of acquisition of its Iberdrola stake, considering the significant drop in share value that the latter has sustained over the last three years. This protracted contraction was threatening to force ACS to write off the depreciation as losses. Instead, by reducing the average cost and surpassing a 20-percent stake, it can now pass it off as a permanent strategic investment that will have no negative impact on its financial statements.

ACS has the obligation to inform the CNMV about the fact that its stake is above the 20-percent mark, and will in all likelihood do so in the coming days. By year's end Iberdrola was worth 31.6 billion euros on the stock market. The construction company's own stake is worth nearly 6.4 billion euros at market prices.

A few weeks ago, the company presided by Florentino Pérez informed stock market authorities that it controlled upwards of 15 percent of Iberdrola, including slightly over 5.1 percent through an equity swap with Natixis.

Since December 2, ACS has bought up more than four percent of the electricity concern, paying around 1.3 billion eurosfor it, according to market price estimates.

The 20-percent criterion is relevant because, according to international accounting standards, any shareholder who holds more than that amount of the voting power of an investee is considered to exert "a significant influence" over the company.

This allows ACS to enter the investment into the accounts through the participation method, which means that it can reflect on its own statements the share of benefits representing its share of capital in the investee.

But this is not ACS' immediate goal. Although the construction group has not yet reached a decision on the issue, the additional profits to be had in this way would be balanced out by the need to adjust the value of its holding.

Additionally, the financial reporting standards establish that "the assumption of significant influence can be reversed through a clear demonstration to the contrary. [...\ It is possible for an investor to not have significant influence, even with majority ownership of an investee."

In theory, ACS could maintain that, even though it is by far the largest shareholder in Iberdrola, it does not exert significant influence because it is not on the board, does not help set out its dividend policy or business strategy, and other factors considered in the accounting standards do not apply. Given that its power of influence is a matter for debate, and because the construction company does not badly need those profits, the likeliest scenario is that ACS will not opt for this consolidation method.

Halfway through the year, a new rule will go into effect banning a ceiling on shareholder voting rights (10 percent in the case of Iberdrola). At that point, ACS will be able to wield its 20-percent voting power in the board of directors. ACS has also put its renewable energy unit up for sale, thereby eliminating the incompatibility that Iberdrola cited as the reason for vetoing ACS representation on its board.

Confrontation has been the norm between ACS and Iberdrola's upper management. At the latter's last board meeting, an ACS representative was appointed member of the board, only to be removed from his post minutes later.