Americans sweep in for Sweb

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Industrial Correspondent

Southern Electric International of the US has launched a hostile bid for South Western Electricity at pounds 9 a share, valuing the company at pounds 1bn. The bid - which is less generous than expected - would be financed through a mixture of debt and equity and could leave Sweb with gearing of 120 per cent.

The bid follows a dawn raid on Monday in which SEI bought 11.2 per cent of Sweb, also at pounds 9 a share. Talks between the two companies took place the next day but ended in collapse.

Ray Hill, SEI's chief financial officer, said the price is lower than originally envisaged because of the clampdown on electricity distribution prices announced last week by the regulator, Offer.

It also emerged that SEI had talks with some larger, unnamed, regional electricity firms with a view to taking over smaller companies. Mr Hill said that the company decided finally to go it alone to avoid any "anti- competitive consequences".

The offer for Sweb is pounds 38 in cash and pounds 52 in redeemable bonds for every 10 Sweb shares or a full cash alternative of pounds 9 a share. Shareholders accepting the offer will also receive the proposed final dividend of 20.3p net, payable in October.

There is a further alternative that allows shareholders to receive "grid bonds" instead of part of the cash, which would give them the right to shares in the National Grid Company - owned by all 12 regional firms - in the event that it is sold.

This option values Sweb's part of the NGC at pounds 2 per share.

"Whatever people want we will give them as long as it comes to pounds 9 per share. Based on all the analysis we have done, we feel that this is worth pounds 9 per share."

John Seed, chief executive of Sweb, rejected the offer as "unacceptable" and attacked SEI for launching the bid without further talks. Sweb's shares rose by 11p yesterday to 938p.

Mr Hill revealed that this is the largest acquisition attempted by the parent group, The Southern Company, and its first hostile bid. It also emerged that the US group rejected any use of "contracts for differences" or "derivative strategies" as part of the bid. Its adviser, SBC Warburg, caused consternation in the City through the use of contracts for differences in the Trafalgar House bid for Northern Electric, which lapsed in March.

Thomas Boren, president and chief executive officer of SEI, said that the use of such strategies - which would need to be cleared with City regulators - was put forward as an option by SBC Warburg. "We all concluded that although it was blunderbuss technology, the best way was to mount a dawn raid," he said.

Mr Boren said that Sweb was chosen partly because SEI believes it can increase the company's efficiency and accelerate the cost-cutting plans.