All set to invade America

News Analysis: For UK utilities, the US is a first step toward realising their global ambitions

THE US invasion that swept the British utility sector in the last three years is about to go into reverse, with the top UK utilities fighting for a beachhead in North America.

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.

Voices
On the last day of campaigning before the polling booths open, the SNP leader has written to voters in a final attempt to convince them to vote for independence
voicesIs a huge gamble on oil keeping the First Minister up at night?
Life and Style
tech

Apple has been hit by complaints about the 1.1GB download

Arts and Entertainment
Pointless host Alexander Armstrong will voice Danger Mouse on CBBC
tv

Much-loved cartoon character returns - without Sir David Jason

Arts and Entertainment
Liam Neeson said he wouldn't
tv

Liam Neeson's Downton dreams

PROMOTED VIDEO
Arts and Entertainment
Actor and director Zach Braff
tv

Arts and Entertainment
Rosalind Buckland, the inspiration for Cider with Rosie died this week
booksBut what is it like to be the person who inspires a classic work of art?
Arts and Entertainment
tv

Life and Style
i100

Arts and Entertainment
The former Doctor Who actor is to play a vicar is search of a wife
film

Matt Smith is set to join cast of the Jane Austen classic - with a twist

Arts and Entertainment
Lionel Messi in action for Barcelona
filmWhat makes the little man tick?
Arts and Entertainment
Meera Syal was a member of the team that created Goodness Gracious Me
tv

Actress to appear in second series of the hugely popular crime drama

Arts and Entertainment
tvReview: An undercooked end (spoiler alert)
News
i100
News
ebooksAn unforgettable anthology of contemporary reportage
Arts and Entertainment
Pharrell dismissed the controversy surrounding
musicThe singer said 'the last thing I want to do is degrade'
Sport
Cesc Fabregas celebrates his first Chelsea goal
footballChelsea vs Schalke match report
Arts and Entertainment
Toby Jones (left) and Mackenzie Crook in BBC4’s new comedy The Detectorists
tvMackenzie Crook's 'Detectorists' makes hobby look 'dysfunctional'
Life and Style
fashion

Olympic diver has made his modelling debut for Adidas

News
i100
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

Property Underwriter

£70-90,000: Saxton Leigh: Our client a London Market Insurer are seeking a Pro...

Operational Risk Manager - Asset Management

£60,000 - £80,000: Saxton Leigh: Our client is an leading Asset Manager based...

Trainee Recruitment Consultant Birmingham

£18000 - £23000 per annum + Comission: SThree: The SThree group is a world lea...

Trainee Recruitment Consultant - Birmingham - Real Staffing

£18000 - £23000 per annum + Commission: SThree: Real Staffing are currently lo...

Day In a Page

Mystery of the Ground Zero wedding photo

A shot in the dark

Mystery of the wedding photo from Ground Zero
His life, the universe and everything

His life, the universe and everything

New biography sheds light on comic genius of Douglas Adams
Save us from small screen superheroes

Save us from small screen superheroes

Shows like Agents of S.H.I.E.L.D are little more than marketing tools
Reach for the skies

Reach for the skies

From pools to football pitches, rooftop living is looking up
These are the 12 best hotel spas in the UK

12 best hotel spas in the UK

Some hotels go all out on facilities; others stand out for the sheer quality of treatments
These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

Widespread fear of Isis is producing strange bedfellows

Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
Topshop goes part Athena poster, part last spring Prada

Topshop goes part Athena poster, part last spring Prada

Shoppers don't come to Topshop for the unique
How to make a Lego masterpiece

How to make a Lego masterpiece

Toy breaks out of the nursery and heads for the gallery
Meet the ‘Endies’ – city dwellers who are too poor to have fun

Meet the ‘Endies’ – city dwellers who are too poor to have fun

Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

Ian Paisley’s decision to make peace with his IRA enemies

His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam
'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

Exclusive extract from Janis Winehouse's poignant new memoir
Is this the role to win Cumberbatch an Oscar?

Is this the role to win Cumberbatch an Oscar?

The Imitation Game, film review
England and Roy Hodgson take a joint step towards redemption in Basel

England and Hodgson take a joint step towards redemption

Welbeck double puts England on the road to Euro 2016
Relatives fight over Vivian Maier’s rare photos

Relatives fight over Vivian Maier’s rare photos

Pictures removed from public view as courts decide ownership
‘Fashion has to be fun. It’s a big business, not a cure for cancer’

‘Fashion has to be fun. It’s a big business, not a cure for cancer’

Donatella Versace at New York Fashion Week