A dash for Gas is not out of the question

City & Business
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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.

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