All set to invade America
News Analysis: For UK utilities, the US is a first step toward realising their global ambitions
Tuesday 25 August 1998
British progress so far has been less than impressive, with a pile of failed transatlantic merger documents consigned to the shredder. PowerGen could not pull off a $16bn (pounds 9.8bn) link with Houston Industries and Scottish Power was unable to clinch the $4bn takeover of Florida Progress.
But these are early days for leading industry figures such as Ed Wallis, chief executive of PowerGen, who has made it clear he wants to create a global combine before he retires.
Corporate ego and the business mantra of consolidation is backed up by sound reasons why UK utilities should break out of their boring backyards.
The US is a necessary first step for PowerGen, while UK competitors such as National Power, Scottish Power and others also want to use the high pound to build their foreign empires. "Everyone is talking to everybody else. Second-tier US companies feel they must grow quickly or be swallowed up by larger competitors," said one City analyst.
Problems to be wrestled with include the local US regulators, who still appear to have reservations about foreign ownership, and a tough line on what constitutes a reasonable rate of return. Problems are compounded by the very high valuations currently put on the US utilities as bid fever grows.
Scottish Power's name has been linked with Cinergy, while British Energy has already secured a foothold with its Peco Energy joint venture, AmerGen.
But the American assault on UK assets is by no means over, despite many considering that their best prospects lie at home. US groups have bought eight of the 14 UK regional electricity companies (RECs) since the end of 1995.
That strategy has not been a total success. Already Virginia-based Dominion Resources has offloaded East Midlands Electricity to PowerGen, albeit for a tidy profit. Meanwhile, New Orleans-based Entergy has announced plans to sell London Electricity.
But Pacificorp is now seen as a contender to buy London Electricity, while Energy Group - the UK's largest electricity supplier - was snapped up recently for pounds 4.5bn by Texas Utilities.
So why are British companies so interested in US assets, and vice versa? Deregulation is the starting point, and the subsequent actions of the regulators are further factors.
As competition in the home markets has become tougher for regulated companies, utilities have sought to spread their risk and head overseas.
The American invasion was triggered by the low valuations put on the regional electricity companies over here. With deregulation of the sector proceeding faster in Britain than the US, American companies saw themselves gaining valuable experience that could be used later at home. They also believed that a similar language and business culture was a good first step abroad; their sights were set in the longer term on continental Europe.
But a range of issues demoralised the Americans. The opportunities for efficiency savings were not as great as anticipated, but the biggest blow came from the new Labour government's windfall profit tax, which damaged the scope for making serious profits out of companies which were bought for top-drawer prices.
Labour's decision to restrict the building of gas-fired power stations has also dented confidence and fuelled fears that the regulatory environment is less certain than first thought.
There is now growing apprehension about the pending price review, which will cover the period 2000-2005, while local UK companies are deemed, by some experts, to be better placed to take advantage of further consolidation.
The Government's decision to run electricity distribution and supply operations under separate licences will bring a further shake-up. Analysts say that in two or three years the 12 RECs in Britain could have become half this number, while there could be four or five national supply businesses.
Leading British utilities are rapidly concluding that they can make more money by offering existing customers not just electricity, but gas and water too.
But the US market is attractive to UK companies as the electricity utilities here have seen their valuations buoyed up by all the bid activity. With the UK entering a mature market phase, with downsizing and cost cutting nearing their peak, the British companies see the US as virgin territory in which to ply their skills. Although US giants such as Texas Utilities have been busy on the UK stage, there is a swathe of lower-capitalised US firms which could benefit from outside management expertise.
UK companies such as National Power have already established a presence in Asia and beyond. But the US is attractive because it is culturally and legally similar to Britain. The Far East is now considered too risky, as is Eastern Europe, while opportunities in Latin America have been hoovered up by rivals from countries such as Spain.
New federal legislation has also triggered consolidation in the US in an industry which is notoriously fragmented.
Chris Rowland, the managing director of European utilities research at Merrill Lynch, sees rich pickings for British and other European companies in the US. "Most European companies will look to the US as a means of achieving global ambitions. After a decade of privatisation, incentive regulation, competition and cross-selling electricity and gas supply, UK utilities seem particularly well-positioned to exploit emerging opportunities to the full."
The transatlantic process that began with electricity and gas could move into water. Some experts believe the final moves could lead to the emergence of a group of mega-utilities, half of them based in the US and half in Europe. In their global reach and corporate power, the mega-utilities could rival the oil companies. A new version of the Seven Sisters, perhaps?
Finding the right partners in the US might dictate whether PowerGen and Scottish Power join this mighty clique.
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