COMMENT : Open season for bids in the electricity sector
"The balancing act regional electricity companies must now perform is to pay out sufficient to shareholders to make themselves unattractive to predators while leaving enough flesh to guarantee a viable future"
Wednesday 15 February 1995
This bid was never likely to be referred but the market convinced itself otherwise. The arguments for reference were always illogical, and sometimes flakey. Not that this stopped some influential people putting the case. By all accounts even Professor Stephen Littlechild, the electricity regulator, eventually plumped for a reference on the grounds that this was the first takeover in the sector and legitimate public interest concerns ought to be addressed. The problem was it was never entirely clear what was meant by this.
Fortunately for Trafalgar, Sir Bryan Carsberg, doyen of utility regulators and now director-general of Fair Trading, couldn't understand either. In the end he didn't even try to make clearance conditional on legally binding undertakings. Instead he satisfied himself with Trafalgar's "assurances". Even if Michael Heseltine had wanted to refer the bid, he would have found it difficult in the light of such a recommendation.
While the Government remains in power, it is now open season for bids in the electricity sector. How many of the 12 regional electricity companies will be bid for in practice remains to be seen. Market expectations of at least six are probably exaggerated.
Even so, it is not just Northern that is having to look to its defences. The rest of the sector will need to as well. The main plank of the defence is payment of a substantial special dividend - in Northern's case probably upwards of £3 a share. Other companies too will be forced to take on substantial quantities of debt to keep up with the Joneses. The balancing act regional electricity companies must now perform is to pay out sufficient to shareholders in the form of special dividends to make themselves unattractive to predators while leaving enough flesh on the bone to guarantee a viable future. This is the territory on which the Northern and subsequent electricity bids will be fought.
BP pulls itself back from the brink
David Simon's rehabilitation of BP is now formally complete. The company that looked as if it had lost the will to win a few years ago has managed a dramatic recovery in what for the oil industry is a very short period indeed.
Never a staid and steady giant like Shell, BP has had to pull irons out of the fire at several other critical junctures in its history, including the great days of the 1970s when the North Sea and Alaska rescued the company from crisis in the Middle East.
This time, the secret has not been a gambler's nose for sniffing out giant oil finds, but a rather more familiar mixture of focused management of new developments, disposals, staff cuts - an extraordinary halving of the workforce in a few years - and cost and investment controls. A cyclical improvement in chemicals has usefully rounded it off.
Ungratefully, the share price went down yesterday as the company reported its final quarter, but you cannot win them all. With profit last year ahead of the target set three years ago for 1995, the reaction is a classic case of buying the story and selling when it comes true. Indeed, most analysts already reckon the 1996 target of replacement cost profit before exceptionals has been set on the low side at $3bn.
Rather than a massive recovery play, the assessment of BP now revolves around whether it is - or is not - still 10 or 15 per cent undervalued against other majors, or a few per cent cheap against the UK market. That is not the stuff of big price movements, especially when such calculations could swiftly be overshadowed by oil market changes, one way or the other.
But this should not obscure the importance of what has happened at the company. The obsession with the US has been overcome, and the geographical spread is becoming much better balanced.It is nice to know BP is back to being a world class company.
Political realities undermine pound
It may be unjustified but, as yesterday's events in the foreign exchange markets bear witness, the international investment community has lumped Britain firmly into the high political risk category. It doesn't appear to matter that there will not have to be a referendum over Europe after the Liberal Democrats' token House of Commons victory on Monday. Other European currencies such as the lira, peseta and even French franc have been labouring under the same burden since at least the New Year. This is all part of the great 1995 flight to quality, otherwise known as the German mark.
For sterling, the problem will become worse in the short term because published inflation figures will start to climb. No matter that this has been widely predicted for months - in the climate of selling currently hanging like a February depression over the pound, rising inflation may well drive the exchange rate back to its post-exchange rate mechanism low.
The perception could easily become entrenched, according to the traders who talk to international investors, that Britain is much like Italy with a mixture of inflationary pressure, political risk and peripheral European nation status. This suggests that the currency market might demand an increase in the premium for holding pounds - in other words, much higher interest rates. The Bank of England is rightly proud that the gap between British and American or German rates has narrowed under its monetary policy regime, and a reversal would be a bitter pill.
According to most economists, the British economy is in good shape. Inflation is still near a 20-year low, growth is strong but slowing down as needed. Export orders are at record levels and the balance of payments is in much better shape than anybody predicted a year ago. In the circumstances, the Bank is right to feel chagrined that international confidence in the currency has taken a melodramatic turn for the worse. The problem is that though the economic fundamentals may be sound, the political ones are not.
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