A costly contest for Northern

Shareholders in Northern Electric will be cursing Professor Stephen Littlechild, the electricity regulator, for keeping it from the clutches of Trafalgar House. The shares have fallen 40 per cent against the market since the regulator stunned the sector in March by announcing a new review of electricity prices, the second within a year.

The move in effect put the kibosh on the pounds 1.2bn bid from Trafalgar, which has since unveiled such a tale of misery that there is no realistic chance of it ever mounting a further bid.

Interim figures from Northern yesterday suggest another reason for shareholders to criticise Professor Littlechild. Gross profits fell pounds 13.4m to pounds 139m in the six months to September, mainly due to the first distribution price review last year, which tightened the cap on charges. The company did well to mitigate some of the effects of the review, cutting staff costs by pounds 5.7m, but the biggest boost to slightly higher operating profits was the pounds 11.1m cut in restructuring charges. At the pre-tax level, profits slumped from pounds 63.4m to pounds 58.7m.

The pounds 2.9m costs associated with the company's "scorched earth" policy against Trafalgar - issuing a 100p-a-share special dividend and the bonus issue of preference shares - plus pounds 3.4m in higher interest charges as a result of a share buy-back more than offset gains elsewhere. Meanwhile gearing has edged up a couple of points to 26 per cent since the year- end.

It cannot be denied that the company has delivered value to shareholders. It is passing through all the benefits of the interest in the National Grid, with investors not only picking up Northern's shareholding in the Grid, but the net dividends as well, worth 4.58p in these figures.

On top of that, the company is committed to pay another special dividend - expected to be 56.5p in February 1997 - and increase the ordinary payout by 7 per cent a year until the next century.

Based on the company's forecast dividend of 39.9p for this year, the shares, unchanged yesterday at 583p, stand on a prospective yield of 8.4 per cent. That looks high for what should be a safe earnings generator and 650p would put the yield on a more realistic level.

With "clean" profits set to reach around pounds 109m this year, a forward price/earnings multiple of just 7 could tempt further bidders to enter the fray. The risks remain high, though. Gearing is set to soar to over 400 per cent by the end of the decade, if preference shares are included, and could stay high well into the next century. Still not one to chase.