EU Rebukes Spain

The commission, the EU's top competition regulator, said the government in Madrid had breached competition rules and internal market regulations after its national authorities placed conditions on the German bid.

E.ON launched an offer in February to buy Endesa for 29.1 billion euros ($37 billion) and the commission gave the German group the green light in April to press ahead with its takeover plans.

But Madrid preferred a merger between Endesa and the country's biggest gas supplier, Gas Natural, and Spain's own competition regulator placed about 19 conditions, most of them contested by the commission, on E.ON's offer. Prior to E.ON making its offer, Gas Natural made a bid of 22.5 billion euros for Endesa.

"The commission will uphold its right to apply the EU's merger control rules to the benefit of all companies and all citizens within the single market," EU Competition Commissioner Neelie Kroes said.

Spanish ambitions

The EU ruling, which is legally binding but can be contested in the European Court of Justice, is a setback for Spanish hopes to build a national champion in the energy sector to protect the industry from foreign influence. It also means conditions placed on E.ON's offer are now illegal and that the German group can ignore them and, if it chooses, take court action against the Spanish government.

Those conditions included the divestment of substantial, mainly nuclear, assets, representing 35 percent of Endesa's Spanish-based installation capacity.

Spain's industry minister told reporters on Monday that Madrid was likely to comply with the ruling.

E.ON still wants Endesa

Brussels condemned Madrid under article 21 of an EU treaty that gives it alone the right to authorize or block a merger in the 25-country union, and which stops national authorities from over-turning its decision.

In a "reasoned opinion," it also ruled that Spain had contravened EU internal market regulations by unduly restricting "free movement of capital" and the "right of establishment," laid down in the bloc's treaties.

A "reasoned opinion" is the final step before taking action at the European Court of Justice if a country does not comply. In this case, however, the commission has left open the possibility for talks.

Although the ruling is a victory for E.ON, the bid was complicated after the Spanish public works group Acciona bought 10 percent of Endesa, as it appears to be moving toward building up major stake. That would put pressure on E.ON to increase its bid for Endesa or force it into an uncomfortable alliance with Acciona.

Shares in E.ON fell sharply in early trading in Frankfurt on Tuesday after the sale, in which Acciona paid an estimated 3.38 billion euros, was announced.

But the German firm said it still wanted to acquire Endesa despite the surprise move.

"E.ON reaffirms its strong commitment to pursuing its offer for Endesa and expects to quickly fulfill all the necessary requirements to do so," the company said in a statement.

Spanish Economy and Finance Minister Pedro Solbes said that his government "neither supported nor opposed" Acciona's acquisition.

For his part, Acciona's director for development, Juan Muro-Lara, said the company's investment "does not reflect a desire to exercise control over decisions at Endesa."