A dash for Gas is not out of the question

City & Business

The stock market has delivered a rather grumpy verdict on the decision by British Gas to seek a reference to the Monopolies and Mergers Commission in order to resolve its differences with Ofgas over price controls to be imposed on TransCo, its pipeline business. The shares have fallen 6 per cent in the last two days. That is a little surprising given the reference was hardly unexpected. There are also very good reasons why the price should remain stable, not least because of the intriguing prospect of a takeover bid.

Although there have been vague rumours of a bid in the past the share price has been overshadowed recently by the battle with the regulator. Given the Ofgas proposals would cut after-tax cash flows by more than half, this is understandable. Profits would be cut and it is fair to assume that the dividend would be in jeopardy.

With so much bad news swirling around the company, it is hardly a business that oozes with obvious appeal. With profits and dividends under pressure, a bitter relationship with the regulator and a Labour Party muttering about windfall taxes on privatised utilities, British Gas does not have takeover target written all over it.

However, the two-dimensional view of British Gas has obscured the potential that is vested in the business. In particular, there has been little attention paid to the consultants' report commissioned by Ofgas that provided the basis for the regulator's cost-cutting proposals. Those reports have not been published but they are said to represent a withering condemnation of how the company is managed.

If those reports are soundly based, not only could British Gas meet the regulator's targets but it could also cut costs even further. At that point there would be benefits for customers and, more importantly, for shareholders. In other words, there is value still to be added.

If outside consultants can reach such damning conclusions about British Gas, then so can the sophisticated corporate finance teams representing the world's energy companies. They will appreciate that British Gas will be extremely vulnerable throughout the MMC inquiry.

It would be extremely difficult, for instance, for British Gas to argue in defence of a bid that it could cuts costs and raise dividends, given that the reason it is at the MMC is because it says it cannot cut costs and faces pressure on its dividend. It is actually indefensible.

Any bidder would inevitably seek close consultation with Ofgas ahead of a takeover, and the promise of voluntary cost cutting would be looked upon extremely favourably by a regulator as frustrated as the British Gas executives about the current impasse.

A bidder would therefore be launching a two-pronged attack suggesting that not only could it manage the business better but that it could also do a better job with managing the regulatory risk. That may well have some appeal for investors, who have seen little added by way of value in recent months.

The planned demerger at British Gas is something of a sideshow. The real battle is for TransCo. A bid at around the market price could be couched in terms that suggested that the price being offered was for TransCo with free shares in the trading company as the equivalent of a bid premium.

The weakened British Gas shares become the more attractive it becomes as a bid target.

Political gag on EMU

ONE of the most striking features of last week's IMF meeting in Washington was the interest being shown in a single European currency. Everyone had a view unless they were British officials. The British officials all had views, but they were not prepared to share them publicly.

In the vanguard of the silent British pundits was Kenneth Clarke, the Chancellor of the Exchequer. He steadfastly refused to offer anything other than a carefully rehearsed statement that oozed glorious neutrality. He was more than happy to accuse the media of twisting his words and moaned that the British public were being denied the serious debate on Europe they deserved, but he was not prepared to elevate the discussions to a loftier plane than that occupied by the Eurosceptics.

Mr Clarke's view, quite simply, is that in the run-up to this week's Tory party conference it is more than his job's worth to put his head above the parapet. That is a great pity. If the politicians have already conceded that they cannot engage in serious debate of this important issue then what chance do the rest of us have of making any sense of an extraordinarily complex subject?

As Richard Freeman points out opposite, the debate about European Monetary Union has shifted markedly in the last few months. It has moved from if to when. No longer is it possible to ignore a single currency. It is coming and whether Britain is in or out by then it will have some bearing on us all.

Indeed, at the meeting of G7 finance ministers the Europeans were quizzed, for the first time, about EMU. US Treasury Secretary Robert Rubin reported that there was a general view in the room among the Europeans that they were moving towards EMU. Elsewhere around Washington there was broad consensus that a single currency is on its way.

Hilmar Kopper, spokesman of Deutsche Bank's Board of Managing Directors, painted an eloquent picture of a financial sector that will change dramatically in the wake of EMU. There was no doubt in his mind that it will start on time in 1999. His view is that Britain will not join until three years later, but he insists that the impact will be felt in the City before that. He does not, however, subscribe to the view that London will lose out.

More significantly, Mr Kopper also bemoans the absence of wider debate on the issue. He is concerned that the public is not yet fully aware of the implications of EMU even though there is evidence in Germany of support for a single currency.

He points to a recent state election where the candidate who had campaigned on vociferous anti-EMU ticket was heavily defeated. However, he recognises that there is still much for the politicians to do in order to improve public awareness.

Mr Clarke is right when he says the public has not had the debate it deserves. British businessmen are preparing for that debate, but they are waiting for their cue from the politicians.

Life and Style
A teenager boy wakes up.
life
Life and Style
It is believed that historically rising rates of alcohol consumption have contributed to the increase
food + drink
Voices
The erotic novel Fifty Shades of Grey has already been blamed for a rise in the number of callouts to the fire brigade for people trapped in handcuffs
voicesJustine Elyot: Since Fifty Shades there's no need to be secretive about it — everyone's at it
Arts and Entertainment
Critics say Kipling showed loathing for India's primitive villagers in The Jungle Book
filmChristopher Walken, Bill Murray, Scarlett Johanssen Idris Elba, Andy Serkis, Benedict Cumberbatch, Cate Blanchett and Christian Bale
PROMOTED VIDEO
Life and Style
Playing to win: for Tanith Carey, pictured with Lily, right, and Clio, even simple games had to have an educational purpose
lifeTanith Carey explains what made her take her foot off the gas
Arts and Entertainment
The White Sails Hospital and Spa is to be built in the new Tunisia Economic City.
architectureRussian billionaire designs boat-shaped hospital for new Dubai-style Tunisia Economic City
Arts and Entertainment
You could be in the Glastonbury crowd next summer if you follow our tips for bagging tickets this week
music
Life and Style
tech
News
ebooksAn unforgettable anthology of contemporary reportage
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Trust Accountant - Kent

NEGOTIABLE: Austen Lloyd: TRUST ACCOUNTANT - KENTIf you are a Chartered Accou...

Graduate Recruitment Consultant - 2013/14 Grads - No Exp Needed

£18000 - £20000 per annum + OTE £30000: SThree: SThree are a global FTSE 250 b...

Law Costs

Highly Competitive Salary: Austen Lloyd: CITY - Law Costs Draftsperson - NICHE...

SQL Developer (Stored Procedures) - Hertfordshire/Middlesex

£300 - £330 per day: Ashdown Group: SQL Developer (Stored Procedures) Watford...

Day In a Page

Isis is an hour from Baghdad, the Iraq army has little chance against it, and air strikes won't help

Isis an hour away from Baghdad -

and with no sign of Iraq army being able to make a successful counter-attack
Turner Prize 2014 is frustratingly timid

Turner Prize 2014 is frustratingly timid

The exhibition nods to rich and potentially brilliant ideas, but steps back
Last chance to see: Half the world’s animals have disappeared over the last 40 years

Last chance to see...

The Earth’s animal wildlife population has halved in 40 years
So here's why teenagers are always grumpy - and it's not what you think

Truth behind teens' grumpiness

Early school hours mess with their biological clocks
Why can no one stop hackers putting celebrities' private photos online?

Hacked photos: the third wave

Why can no one stop hackers putting celebrities' private photos online?
Royal Ballet star dubbed 'Charlize Theron in pointe shoes' takes on Manon

Homegrown ballerina is on the rise

Royal Ballet star Melissa Hamilton is about to tackle the role of Manon
Education, eduction, education? Our growing fascination with what really goes on in school

Education, education, education

TV documentaries filmed in classrooms are now a genre in their own right
It’s reasonable to negotiate with the likes of Isis, so why don’t we do it and save lives?

It’s perfectly reasonable to negotiate with villains like Isis

So why don’t we do it and save some lives?
This man just ran a marathon in under 2 hours 3 minutes. Is a 2-hour race in sight?

Is a sub-2-hour race now within sight?

Dennis Kimetto breaks marathon record
We shall not be moved, say Stratford's single parents fighting eviction

Inside the E15 'occupation'

We shall not be moved, say Stratford single parents
Air strikes alone will fail to stop Isis

Air strikes alone will fail to stop Isis

Talks between all touched by the crisis in Syria and Iraq can achieve as much as the Tornadoes, says Patrick Cockburn
Nadhim Zahawi: From a refugee on welfare to the heart of No 10

Nadhim Zahawi: From a refugee on welfare to the heart of No 10

The Tory MP speaks for the first time about the devastating effect of his father's bankruptcy
Witches: A history of misogyny

Witches: A history of misogyny

The sexist abuse that haunts modern life is nothing new: women have been 'trolled' in art for 500 years
Shona Rhimes interview: Meet the most powerful woman in US television

Meet the most powerful woman in US television

Writer and producer of shows like Grey's Anatomy, Shonda Rhimes now has her own evening of primetime TV – but she’s taking it in her stride
'Before They Pass Away': Endangered communities photographed 'like Kate Moss'

Endangered communities photographed 'like Kate Moss'

Jimmy Nelson travelled the world to photograph 35 threatened tribes in an unashamedly glamorous style