Can he do the double? Mr Morris thinks so

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The Independent Online
Is the world ready for Scorched Earth 2, the sequel? Whether it is or not, Northern Electric, the company that brought an entirely new meaning to the concept of returning value to shareholders, seems determined to have a go. Its chairman, David Morris, who is to the utilities what Millwall is to football (nobody likes him, he doesn't care), certainly seems to be relishing the prospect of a fight to the death with CalEnergy, the little-known American outfit that came in with a hostile pounds 766m bid yesterday.

Trafalgar House, the last interloper with the temerity to fire its guns at Northern, was seen off by Mr Morris with the help of a pounds 500m distribution that fair took shareholders' breath away but, more importantly, provoked the electricity regulator, Stephen Littlechild, to revisit his lax price control formula, such were the riches unlocked from Northern's balance sheet.

Can he do it a second time round? The mathematics look tricky. If you take the cash price tabled by the Americans and add back in the money so far handed out by Northern in the shape of Grid shares and dividends, preference shares and special dividends, then the offer values Northern at pounds 10.25 - comfortably more than Trafalgar's last shot of pounds 9.50.

Mr Morris still has the remaining 50p special dividend due in February to play with, but since gearing will be 120 per cent by then, he will need to take borrowings to astronomic levels to see off the Yanks. That said, price seems to be all they have going for them. Registered in Delaware, based in Nebraska and with a collection of power stations that seem to be located mainly in the Philippines and Indonesia, CalEnergy does not exactly inspire confidence. A bid at pounds 7 would probably have won the day. But now Mr Morris has his pecker up and looks in the mood for a scrap.

Minority shareholders lose out in cable deal

No one disputes that Mercury's tie-up with three fledgling cable operators is anything other than a great deal for Mercury's parent company, Cable & Wireless. It also looks to be not a bad deal for the two other corporate parents involved, Bell Canada and Nynex. But is it also such a good one for the two groups of minority shareholders caught up in this grand redesign - the minority in Bell Cablemedia and Nynex CableComms? Almost certainly not is the answer, or rather, if it is, it will be no thanks to the terms of the deal, which have been deliberately constructed to suit the majority- owning corporate parents. In their own self interest, all three have trampled rough-shod over minority shareholders, as indeed usually happens in cases like this.

The trouble is that this is not an easy thing to demonstrate, for what we have here is a series of transactions obfuscated by smoke and mirrors that even the experts find it hard to tell exactly who is getting what. The sponsors would like us to believe they are all in it together and that everyone will therefore benefit in equal measure. Not true, as James Dodd and John Karidis, Kleinwort Benson's two telecoms analysts, demonstrate in a circular to clients this week.

Of the two minorities, it is the Bell Cablemedia shareholders who are most disadvantaged. While it is true they are being offered the same terms per share as their corporate parents - it would be illegal if they were not - these terms seem in part to have been compromised by the various other collateral benefits that the parents are deriving from the deal. The minorities are getting a rather smaller share of the cake than they might reasonably have expected because the majority shareholder has a side deal which induces him to accept a lower valuation.

Part of the problem here is that cable companies are not at all easy to value. Still essentially in their start-up phase, they cannot be valued on conventional criteria such as earnings. In the absence of anything better, analysts have therefore tended to value cable companies on the basis of number of homes passed. For Bell Cablemedia shareholders, this makes depressing reading. The deal values their company at just 63 per cent of what is being paid as part of the deal to Videotron holders. The discrepancy is not as pronounced for Nynex CableComm, but it is still there.

Now why did Bell Canada accept such a low valuation? The answer is that it is also tied up in Mercury, where it has a 20 per cent stake. Cable & Wireless has agreed to buy a quarter of that stake for pounds 150m, putting what most people agree is an inflated valuation of pounds 2.9bn on Mercury. As a result, neither Bell Canada nor Cable & Wireless are forced to take a write-down on their investments in Mercury. Both will actually show a profit. It can readily be seen that Bell Canada's agenda is a wholly different one from that of the minority in Bell Cablemedia. The same is true, though to a lesser extent, of Nynex.

There is probably little the minorities can do about this, other than stamp their feet, but the lesson is an old one - nearly all minorities eventually end up getting screwed.

Alliance's charter for carpetbaggers

It is easy to see the strategic thinking behind Alliance & Leicester's decision to make a single flat-rate payment in shares to all its members, worth up to pounds 1,200 a head. As every Chancellor knows, the best way to gather in the votes is to distribute the largess as widely as possible. In this case it just so happens that a substantial proportion of the society's customers are small savers. So big depositors and borrowers hoping to skim off the cream with payments related to the size of their dealings with the society can eat their hearts out.

The decision has a precedent in the Abbey National flotation in 1989, when all savers and borrowers got 100 shares each. But while simple, quick and cheap to carry out, Alliance & Leicester is showing a cavalier disregard for recent practice.

Even Abbey's thinking has moved on. When it bought National & Provincial last year there were extra payments for those who had been with the society more than two years, related to size of deposit. But the worst aspect of Alliance & Leicester's decision is that it is a charter for carpetbaggers, that happy army of punters who have been searching for a windfall gain by putting the minimum deposit in each society likely to float.

Admittedly, Alliance & Leicester raised the minimum deposit from pounds 10 to pounds 500 and later pounds 5,000 before it confirmed its float. But if a hundred- fold gain for the early birds might seem wildly excessive, 20 per cent or more for late arrivals still looks like a carpetbagging, since by then flotation was a certainty for anyone who bothered to read the financial pages. It is impossible to compensate the generations of customers whose deposits and loans built up the society's reserves - and therefore its value - to present levels. But fairness demands at least some extra compensation for long-standing customers and those with large deposits or loans.

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