Comment: Shareholders should nip Welsh bid in the bud

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The Independent Online
They laughed in the valleys and in the City a few years ago when Welsh Water bought a stake in Swalec, the principality's electricity company. The idea was ill conceived as a business strategy, and terribly timed, since it was shortly after privatisation, when any bid for a Rec would have been kicked into touch by the government.

Swalec beat off Welsh Water's unwelcome attentions, and since then relations between the two have been strained, to say the least. This autumn, Swalec announced plans to hand back cash to shareholders clearly designed - despite denials all round - to pre-empt another move by Welsh Water.

No prizes for guessing what has made Iain Evans, chairman of Welsh Water, decide to try again. It must, of course, be the example of Sir Desmond Pitcher of North West Water, just over the border, who has successfully carried off Norweb to create the first multi-utility company in Britain. Mr Evans will no doubt be making the same claims about efficiency gains, joint services and the rest of it, to justify putting together two completely unsuitable businesses.

Welsh Water may have invented the idea, but North West first pushed the concept through. There have been changes on both the Swalec and Welsh Water boards since the original confrontation, and it is not a foregone conclusion that an agreed deal will be rejected out of hand. Nevertheless, the prospects for Mr Evans' plans do not look good, especially since he has been forced into an early disclosure by the Takeover Panel. There is nothing like a bit of warning to give a target company time to marshall its defences.

Swalec is not the top performing Rec, and has a complicated and hilly distribution area that brings extra costs and difficulties. But value for money in a bid is probably not the determining factor in pricing a Rec now, since the fewer there are left the more their scarcity value rises. The price ticket for even beginning discussions on an agreed deal must be near 1270p a share, to match Central and South West's bid for Seeboard, but there are no signs yet of Welsh Water contemplating anything like that amount.

Once a management begins to focus not on business logic and earnings per share but on corporate aggrandisement - as in the North West takeover of Norweb - anything can happen and unfortunately often does. Empire building appears to be an infectious disease. Shareholders should nip this one in the bud before it is too late.