COMMENT: American bid strengthens PowerGen's hand

"The commercial logic of North West Water's bid for Norweb has always been questionable; the more it is forced to offer, the harder to take seriously it becomes"
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Norweb has long been considered one of the more attractive of the regional electricity companies. Its relatively high cost base, along with its modern, state of the art infrastructure, give it greater potential for efficiency gain than perhaps any of the other Recs. Whether this justifies the premium to the rest of the sector that North West Water and the American counter bidders seem prepared to pay, is a different matter.

It is just about possible to see why the Americans should want to pay such a high price. For them, Norweb is a bridgehead into Europe. The opportunity value is worth a considerable amount in itself. Since they are old hands at the business of electricity supply, they presumably also understand what they are doing and how much value there is to extract from this business.

For North West Water however, entering a bidding war seems a much more contentious matter. The commercial logic of its bid for Norweb has always been questionable; the more it is forced to offer, the harder to take seriously it becomes. Shareholders in North West might well want to thank the Americans should they eventually force North West into a dignified retreat. There was little evidence of such second thoughts from Sir Desmond Pitcher and his team yesterday, however; they seemed to be preparing for prolonged trench warfare.

North West shareholders can only hope that Ian Lang, President of the Board of Trade, will come to their assistance and call a halt to Sir Desmond Pitcher's vaulting ambition. Of this, there is some possibility. Until the Americans entered the equation, North West's bid seemed destined to end up before the Monopolies and Mergers Commission. Ministers were uncomfortable with the consolidation of utility power that the bid implied and had largely determined to make it a test case.

The American intervention has made this a more difficult course of action. Plainly Mr Lang cannot refer the Texas Energy Partners' bid to the MMC having already allowed a similar offer for Norweb to proceed unobstructed. To refer North West and not Texas, however, would give the Americans a free hand. This at least seems inequitable.

A similar line is being used by PowerGen in its efforts to persuade ministers not to refer its bid for Midlands. This is a takeover which, unlike the North West Water one, actually does make some commercial and industrial sense. Because it involves structural change in the industry, however, it might be considered a case for reference.

PowerGen informed ministers that it wanted to bid for a regional electricity company as long ago as July. The guidance it got went along these lines: " Go ahead. Consolidation of the industry is both an inevitable and a good thing since it creates a more efficient structure. Furthermore, it creates companies with the critical mass and will to compete properly with one another after deregulation in 1998. Nobody really believes the Recs by themselves will do this."

The politics of the situation may have caused ministers to regret this encouragement. Nonetheless, they are going to find it hard to refer PowerGen now with the example of Norweb before them. If they do, chances are that an American bidder will come in and steal the prize before the MMC completes its inquiry. If there is one person who is happy about the Texas intervention up North, it is Ed Wallis, chief executive of PowerGen. His case against a reference is strengthened.

A lamentable episode at Aerostructures

Shareholders in Aerostructures Hamble, the troubled aircraft components manufacturer, are being given a time-honoured ultimatum from their board and its advisers; accept this takeover bid, derisory though it is, or the consequences could be even worse.

Aerostructures' short stock market history has been a bitter one for those shareholders who bought shares at 120p each at the time of the flotation in May last year. Yesterday's profit warnings from Lord King and his board was the fourth since that flotation. As if that was not bad enough, the company is apparently now close to going bust.

This has been a sorry affair for all concerned, not least for advisers NM Rothschild and Smith New Court, who will be more than pleased if the EIS rescue offer is accepted, allowing them to retire from the scene perhaps as painlessly as they could have hoped. Earlier threats of litigation from angry institutional shareholders never materialised. But neither house will be easily allowed to forget this lamentable episode.

Remember the benefits of privatisation

Privatisation has received such a poor press of late that it is sometimes hard to recall that selling off the family silver actually has some clear economic benefits. A timely reminder of these gains has arrived in the form of a report from the International Finance Corporation, the private sector wing of the World Bank, on its experience of advising on 150 privatisation projects in 54 developing countries since 1986.

The study concludes that privatisation is an overwhelmingly positive move, with clear benefits for both the countries concerned and the privatised companies in the vast majority of cases.

There are three main types of gain: the most important is better and cheaper services for consumers; privatisation also generally results in higher investment and improved infrastructure, particularly in telecommunications; finally, there is a reduced drain on the government budget after the sale of loss-making enterprises. The IFC found gains even in cases where public sector monopolies were transferred to private ownership without the introduction of competition.

There are difficulties, of course. Almost every privatisation will cost jobs in the short term. This is the manifestation of the efficiency gains that benefit consumers generally. The report also highlights less immediate pitfalls. To British ears they have a horribly familiar ring.

Pitfall number one is the conflict between political aims, such as attracting a large number of small shareholders, and getting the best possible price from the sale. Pitfall number two is the difficulty of ensuring good corporate governance and high quality management, especially where the former management remains in place. Pitfall number three is the danger that the regulatory structure will become a political football. To that danger, a sub-clause can perhaps be added, based on experience in Britain; there is always the possibility of regulatory failure - the inability of regulators adequately to protect the interests of customers.

Like all pioneers, Britain is to some extent paying the price of being first. Others have had the benefit of learning from our mistakes. Even in Britain, however, privatisation has yielded enormous benefits, far outweighing in the scale of things its now apparent failings. The privatised water and regional electricity companies have made it all too easy to forget this.