Jeremy Warner's Outlook: For EDF chiefs, le grand départ means leaving without British Energy in tow
Saturday 02 August 2008
First, an apology. I assumed the takeover by Electricité de France (EDF) of British Energy was a done deal when writing about it on Thursday evening, so to readers of yesterday's newspaper edition, I must have looked somewhat behind the curve. Still, I was at least in good company. EDF, the British Government and some parts of the British Energy board thought it was done and dusted too.
What happened to spoil the party? In two words, Neil Woodford, a high-profile fund manager from Invesco. He's made quite a name for himself taking big positions in the UK power sector, and he controls 15 per cent of British Energy. The rest of the stock is tightly held too, and by Thursday night, it was apparent to Sir Adrian Montague, British Energy's chairman, that he had an investor rebellion on his hands.
Advisers told him that the 765p-a-share cash offer that EDF had put on the table – together with an alternative of 700p in cash and a share in the ongoing profits through "contingent value rights" – was an acceptable price, but City investors were having none of it. The board felt it couldn't recommend against the wishes of such a large constituency.
Goldman Sachs has put a value of as much as £11 a share on the company. Analysts at Evolution rushed out a note yesterday which claimed that British Energy was worth up to 920p a share. As can readily be seen, the argument is not about differences valued in pennies. On the face of it, there is an unbridgeable gulf between what EDF is willing to pay and what some City investors think the company worth.
Both British Energy and EDF were careful to keep the door open in their statements yesterday, though it seems clear that nothing will happen this side of the summer holidays. Le grand départ was under way with a vengeance in France yesterday, and never let it be said that anything as vulgar as a business deal is going to come between a Frenchman and his summer holidays. For the next four weeks, Paris will be deserted.
In the meantime, EDF will just have to hope that the already declining wholesale price of electricity will come to its rescue by instructing more realistic expectations as to British Energy's value. The much higher valuations just referred to are based on some fairly heroic assumptions on the future price of power, though admittedly ones that are for the time being supported by forward prices for oil. They also assume continued reduction in outages, a perennial problem for British Energy and one that may get no better as a creaking nuclear infrastructure approaches the end of its natural life. We'll see.
In any case, the idea that the Government's plans for new nuclear build in Britain have gone up in smoke with the collapse of the EDF deal looks misguided. There is no doubt that an EDF takeover of British Energy provided the neatest solution to the problem. EDF has much more ambitious plans than any of its rivals for new nuclear build in Britain. British Energy's Sizewell and Hinckley Point sites provide ready homes for the four new reactors that EDF wants to build. But they are not the only such sites available. Also thought attractive are Wylfa on Anglesey and Oldbury on the Severn estuary, both of which belong to the Government-owned Nuclear Decommissioning Authority. The Government plans to make these sites available in due course through auction. In apparent preparation for the possibility that the British Energy deal might fall through, EDF has also bought up land adjacent to Hinckley Point. In any case, EDF's chairman, Pierre Gadonneix, insists that EDF will be able to meet its plans for four new reactors with or without British Energy.
Nothing can happen until 2010 anyway. This is when the Government's so-called "strategic sites assessment" is due to report on the suitability of sites for new nuclear build. It won't be possible to file for planning permission until then, so the Government can still reasonably argue that its timetable for new nuclear build, with construction beginning in 2013 and the first of the new reactors coming on stream in 2017, remains on track. EDF and British Energy have two years to agree terms.
In the meantime, perhaps British Energy should dust off half-hearted proposals shelved earlier this year for a merger with Centrica. Strategically, the fit is a good one, with BE's fixed-cost source of supply finding a ready outlet in Centrica's retail customer base. It would also put a British company firmly in the driving seat of new nuclear build, though doubts would remain as to competence and balance sheet. At more than £3bn a pop, new nuclear reactors don't come cheap.
That said, it is hard to see why Centrica would be any more acceptable to the shareholders than EDF.
Diving in at the deep end is no excuse for shirking the style stakes
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