Jeremy Warner's Outlook: Centrica wants to be part of our nuclear future
Tuesday 05 August 2008
It's a wonderfully romantic idea, but will it fly? Centrica says that if its talks with EDF on taking a minority position in British Energy come to nothing, then it might revisit the notion of an alternative all-shares merger with BE. How credible is such a notion?
There is considerable scepticism about it in Whitehall, where the best solution to Britain's nuclear future is still thought to be that Eléctricité de France buys British Energy. For the time being, that's off the menu, encouraging Centrica, which would have come in as a minority partner in the EDF deal, to think its original proposal of an all-shares merger might now be seen as a reasonable alternative.
When Centrica's chairman, Roger Carr, first floated the idea of an all-British solution to the UK's nuclear future early this year, he was given a lukewarm reception by the Government and in the City.
In Whitehall, the proposal was seen as an alliance of two relatively weak companies, neither of which obviously had either the balance sheet or the expertise to deliver a new generation of nuclear power stations. Instead, ministers opted for EDF as their preferred route to new nuclear build. There were also doubts in the City as to whether Centrica could pay the necessary premium. In addition to its role as policymaker, the Government is also a big shareholder in British Energy with 35 per cent of the stock.
As part of the deal under which the Government rescued British Energy from insolvency five years ago, liability for decommissioning costs was assumed by the taxpayer. Proceeds of the sale of the 35 per cent stake will go towards defraying these costs. The Government therefore has just as much interest as other shareholders in maximising value. For the Government, the beauty of the EDF deal is that it allowed a clean cash exit at a good price that also met the policy objective of providing a new generation of privately financed nuclear power stations. The Centrica solution might not immediately achieve either of these two aims.
Since the merger was first proposed, the two share prices have moved in opposite directions, with British Energy shares going higher still, but Centrica under some pressure because of the rising costs of wholesale gas supplies. A deal that looked difficult enough even back then looks more problematic still today. It is not clear how, even with the ingenuity of investment bankers, Centrica could, through an all-equity merger, deliver the 765p a share in cash offered by EDF. The dilution involved in so doing would be unacceptable to its own shareholders.
Even so, in the absence of the EDF deal it might still be just about do-able. The EDF price was only available for as long as it was there, and now it has gone. For outside shareholders who rejected it, the concern was that it failed adequately to reflect a world in which energy prices would remain high and possibly go higher still. By merging with Centrica, those shareholders would retain a share of this perceived upside.
Both companies would also become less risky if merged, and therefore more highly valued, at least in theory. British Energy would have the hedge of Centrica's customer base against the possibility of power prices suddenly plummeting again, while Centrica would equally be able to hedge its currently high exposure to volatile wholesale prices with BE's fixed-cost source of supply.
There might be some public policy benefits too. The trouble with EDF is that though it provides more certainty as to new nuclear build, it is also an all-French solution at odds with the British model of energy supply, which is to have a number of competing suppliers. The EDF strategy is to recreate itself in Brit-ain as an imitation of the French parent company, a vertically integ-rated, powerfully monopolistic in nuclear mini-me. The EDF strategy also underwrites a decent future workload for Areva, the French nuclear design and construction company.
As owner of the best sites for new nuclear build, a Centrica/British Energy combination would, by contrast, be able to pick and choose its partners and operators, thereby ensuring a range of different designs and owners. The plan at least deserves a hearing, though for the reasons just given, it's going to need a strong following wind to make it happen.
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