Money: Sid burns his fingers

Dido Sandler looks at the prospects for British Gas
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The Independent Online
If someone ever found Sid, the character everyone was meant to be looking for when British Gas wasprivatised, it is doubtful whether he is grateful to have been detected.

In all likelihood he is among the more than 1.75 million small investors still holding British Gas shares. But according to experts, anyone holding BG shares before the company's demerger later this month could be left with a bloody nose.

The warning compounds investor misery following British Gas's dreadful performance in the past few years. Since privatisation the stock has underperformed the Footsie 100 share index by 33.5 per cent. The recent dispute with the industry regulator over price cuts for the pipeline network, now being investigated by the Monopolies Commission, has knocked the share price by more than 25 per cent.

Yet on 12 February shareholders will convene in Birmingham to vote on the demerger of British Gas plc into two separate companies, Centrica and BG plc.

Centrica will run the UK gas supply, showrooms and service side, and control the vast and valuable Morecambe Bay gas fields. BG will comprise the heavily regulated pipeline business Transco, as well as international oil and gas exploration and production business. For each British Gas share owned, investors receive one Centrica and one BG share.

Although all 1.75 million shareholders will be entitled to take part in the ballot, in practice their vote will not mean much. As usual, institutional shareholders, who own 67 per cent of the company's stock, are expected to wave the demerger through.

British Gas says the split will allow the two sides of the business to concentrate on their own separate commercial directions, after pressure from the industry regulator, Ofgas. The demerger is seen as a revival plan for a company still dogged with problems.

Centrica is faced with pounds 30bn of uneconomic "take-or-pay" supply contracts at inflated prices. It has renegotiated some with BP and Mobil, at considerable cost and expects later this year to settle others. But the burden remains huge.

Then there's competition. British Gas's share of the industrial market has slumped to 35 per cent. Competition for domestic customers is already on trial in the South-west of England where British Gas has lost more than 17 per cent of its customers. By the time it goes nation-wide in 1998 it is bound to slash Centrica's customer base. Managed decline is the name of the game.

So that's the Centrica side of the equation. At BG, meanwhile, the MMC inquiry could see the company's revenues hit from April by as much as pounds 400m a year, as domestic gas bills fall by around pounds 30, if Ofgas gets its way. Centrica has already said it cannot foresee when it will pay a dividend. BG, owner of the lucrative pipeline network, should be the cash cow. But its dividend policy is almost entirely in the hands of the MMC. If it comes off badly, so will investors.

But analysts say the effect in the short- to medium-term of unresolved issues will mean, at best, share instability and slashed dividends. At worst, shares could be in for a hammering.

While shares have delivered well recently, up to 217p yesterday morning compared with 135p in 1986, investors could do better by taking their money elsewhere.

Anthea Gaukroger, investment analyst in the private client department of brokers Greig Middleton, is advising clients to sell their British Gas stocks immediately. "I don't think either of the two parts of the split company will be particularly attractive."

Although prices will be set by the market, and will only be known when trading commences on 17 February, Greig Middleton predicts Centrica will be priced at 45p-55p, and BG will be sold at 165p-175p. Alan Marshall, director of energy research at Robert Fleming Securities, believes BG shares will fetch just 130p, and Centrica 50p-60p.

So is it all doom and gloom? One theory is that if private investors were able to wait 18 months, they might see Centrica's shares rise back to 100p. Should the MMC's April decision turn out more benign than expected, or if overseas explorations fared well, BG shares may also go up Another city analyst, who wishes to remain nameless, says he has told his 60-year- old father to hold his shares. He says: "British Gas has been such an awful investment to date, it's not likely to get worse."

He adds that whereas with other utility stocks, investors can simply lock share certificates in a drawer and wait for the dividend cheques, punters with BG and Centrica shares need to be more vigilant, with 14 April, when the MMC inquiry reports, as the key date to look out for. Sid, meanwhile, wishes he could simply fade away.

Dido Sandler writes for Financial Adviser

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