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Private investors left with no way out


As a public relations disaster it ranks unquestionably among the most spectacular. The question is whether the Treasury and its advisers were negligent in their handling of the £4bn offer for the remaining shares in the two power generators, in effect conning the public and institutions into subscribing.

For the one million private investors who bought the new shares in National Power and PowerGen, it has proved a sharp lesson in the risks of equities. The price of their partly-paid shares, which started trading at a premium on Monday, collapsed barely 24 hours later after the industry regulator, Professor Stephen Littlechild, said he was reviewing electricity price controls that he announced just seven months ago.

Outraged City and overseas institutions concluded that they had been misled, furious that what they see as price-sensitive information was not included in the prospectus.

Some UK institutions are threatening not to pay for their shares, which would force the Government to resell them. Others, notably big overseas investors, have already dumped stock in protest at the handling of the sale and more could follow. Neither prospect bodes well for the share prices.

The private investor is left wondering whether he or she has been conned, and if so, what action to take when the share certificate arrives - the respective answers being yes and nothing.

As far as the underlying investment is concerned the fundamentals are largely unchanged. This was never a stagging opportunity. The attraction of the offer was the high dividend yield on the partly-paid shares and the price incentives were designed to encourage long-term ownership.

What has changed is investor confidence in the regulator, whose duty is to users. Investors in utilities like to see a stable environment. This week's price review does not directly affect the two generators but the fear is that Professor Littlechild could increase the pace of competition there too.

The institutions can afford to dump stock. But the private investor is being advised to hold on while they do. Last night National Power, the larger of the two generators, closed at 173.5p against the 170p retail offer price. PowerGen finished the week all square at 185.5p. Nevertheless, the share prices have taken a fundamental knock from Professor Littlechild's initiative, losing first-day premiums of 16p and 13p respectively, and it would be optimistic to expect a rapid bounce.

"It would be wrong to bail out early,'' said Chris Rowland, European electricity analyst at Merill Lynch. He is advising furious institutional clients to stick with it.

On the question of whether price-sensitive information was excluded from the prospectus, the Government is adamant. Tim Eggar, the energy minister, denied that investors had been conned, claiming that while discussions with Professor Littlechild had been going on for months the Government was unaware until Monday afternoon that he had decided to proceed with the review.

The City was infuriated. "If there was even a risk of this happening then it was negligent not to bring it to the public's attention,'' one analyst said.

Others point to the pulping of the original prospectus one working day before intended publication as proof that the Government's advisers never got to grips with the regulatory issues. John Reynolds at James Capel, said: "It is clear that the brokers to this issue did not fully understand the regulatory implications. These should have been highlighted more.''

For many private investors, the damage is exacerbated because they are also shareholders in the regional electricity companies. When the RECs were floated in 1990 the new private shareholders were automatically registered for the initial sale of the generating companies in March 1991. Over the week the value of the RECs has been savaged.

The Treasury has adopted a Pontius Pilate approach, claiming that while it knew Professor Littlechild was pondering such a move, it did not know whether he would proceed.

Strictly speaking, the Treasury is on safe ground. Its lawyers have been over the prospectus with a fine tooth comb. Certainly there are many references to regulatory uncertainty. That means that any claim for compensation is unlikely to succeed.

The Treasury has more than discharged its duty to get the best price for the taxpayer. But it stands accused of riding roughshod over investors. Unfortunately there is nothing the private investor can do about it.