Jeremy Warner's Outlook: Scepticism is again the presiding sentiment as Aviva turns its eyes from the Pru to the US

Nuclear go-ahead, but who pays? More concern over Rosneft flotation
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The Independent Online

The City is perfectly happy to see British companies snapped up by overseas acquirers, but when it comes to our own companies shopping overseas, the City comes over all reluctant and hostile. Is this right and proper regard for the attributes of shareholder value, or, as it is sometimes seen in the boardroom, is it more a question of risk-averse failure among British investors to back reasonably thought-out strategic vision and ambition?

Whatever the answer, Richard Harvey, the chief executive of the insurance giant Aviva, ran straight into a familiar scepticism when he announced plans yesterday for the $2.4bn acquisition of AmerUs Group in the US.

Coming so soon after the failure of Aviva's bid for Prudential, it smacks of deal-making on the rebound, a badly thought-out something is better than nothing type of buy. The price also looks on the expensive side, even taking account of the fact that AmerUs is a market leader in one of the fastest-growing areas of the US long-term savings market, indexed annuities. Still, at least it lays one particular ghost to rest. By setting his sights on AmerUs, Mr Harvey is signalling that the quest for Prudential is over for good. He continues to believe that merger with Prudential would have been a perfect geographic fit, which would in time have generated oodles of value. But what is not to be is not to be and, in effect, Mr Harvey has already moved on.

Instead, he's returned to AmerUs, a company he's been in bid talks with before. Unlike the Pru, this will not be a transformational deal. Indeed, at little more than one-tenth the size of Aviva, it presents little, if any, threat to shareholder value, even if it turns out that Mr Harvey is overpaying. Yet it will require new equity to be issued, and as just a stepping stone to bigger things in the US, it is presumably the intention to move quite rapidly to further acquisitions.

Mr Harvey appears hot to trot in expanding his insurance empire, and this is making the City nervous. In the end, Aviva will probably get the backing it needs. Similar scepticism greeted the company's purchase of RAC, yet this is now generally regarded as a rather successful acquisition. Even so, Mr Harvey may have to demonstrate similar success with AmerUs before the City allows him to move on to his next target.

Nuclear go-ahead, but who pays?

No prizes for guessing the outcome of next week's Energy Review. Unless those drafting it are completely out of touch with the wishes of the Prime Minister, there will be plenty of lip-service towards renewables but also the go-ahead for a new generation of nukes.

Virtually everyone has jumped aboard the nuclear bandwagon over the past two years, so there is already a strong degree of consensus that nuclear should be kept a key part of the energy mix. But lest it be forgotten, this is a relatively new love affair for Labour, which was originally elected on an anti-nuclear platform.

Still, everyone's entitled to change their mind, and the twin concerns of security and climate change now make some sort of a nuclear future a racing certainty. As things stand, nuclear accounts for about 20 per cent of our electricity needs. If ageing nuclear capacity isn't replaced, Britain will be left almost wholly reliant on imported gas and coal, which is both risky and dirty.

Yet there is a world of difference between accepting the case for nuclear and ensuring its delivery. There are two main prerequisites. Planning constraints have to be removed, allowing the construction of new nuclear power plants to be fast-tracked. If, as occurred with Sizewell B, it takes five years for the proposals to get through planning procedures, nobody is going to bother to build them. It simply wouldn't be worth the candle. Second, there has to be a long-term solution on nuclear waste, which almost certainly means construction of a deep repository. The only problem is that nobody wants one of these things on their back doorstep.

Even if these two prerequisites are met, I'm personally sceptical that a new generation of nuclear power plants can be financed without government intervention, either directly by way of guarantee or subsidy, or indirectly through market subversion.

All the main contenders for new nuclear build - Areva of France, GE of the US, and the Japanese-owned Westinghouse - naturally insist otherwise, yet none of them appear willing to finance the things themselves; we are engineers, not financiers, they all say as if reading from the same hymn sheet.

So who would finance nuclear and what would persuade them to do so? Ultimately, it would have to be the City, but how much of a risk are private investors prepared to take? History doesn't give much encouragement. In Britain at least, nuclear power has proved hopelessly uneconomic. This is only partly explained by the technological cul de sac of AGR design that Britain pursued. Even discounting the cost of the capital sunk, operational costs have proved high, plunging the industry into crisis every time the price of alternative fuel sources sinks beneath a certain threshold.

The latest designs are said to be of more predictable cost. They are also both safer and much more efficient. According to Areva, they are easily price competitive with alternatives given present energy prices, even taking account of the costs of waste storage and decommissioning. But the question of what happens when the price of energy takes a dive has still to be properly addressed. How are long-term rates of return on this baseload capacity to be made attractive enough to ensure private finance?

Nuclear generators with substantial retail distribution would be reasonably placed to withstand periods of low energy costs, but even so, owners of nuclear capacity could quite quickly find themselves having to sell power at below cost. Maybe I'm wrong. Maybe City investors and bankers will be just falling over themselves to finance Britain's next-generation nuclear programme. Yet without a nuclear obligation, requiring distributors to source a set proportion of their power needs from nuclear, somehow I doubt it.

More concern over Rosneft flotation

I've taken soundings in the City about this and can report that there is growing concern about the way the Rosneft flotation is being handled. Despite the questionable legal status of this giant Russian oil company's assets - they were only recently sequestrated from the jailed Russian oligarch Mikhail Khodorkovsy - the IPO has been aggressively priced, and all other things being equal, it would struggle to get away.

Yet somehow or other it has come into the public domain both that there are a number of strategic partners ready to subscribe, if not already signed up, and that with a week still to go, the offer is in fact already fully subscribed. There is no independent verification of either of these assertions. BP for one, named in several reports as fully signed up to the offer as a strategic investor, insists that it hasn't yet made up its mind.

Blue Arrow was the case in the 1980s where bankers deliberately misled the market into believing a rights issue had been well-received in the City, when in fact large chunks of it had been left with the sponsoring banks. I'm not suggesting that the bankers in this case are misleading the market. For all I know, the offer may indeed be fully subscribed. Yet what looks like an increasingly desperate attempt to reassure the City that everything is going swimmingly suggests powerfully that it is not.

Somehow or other, the Russians will get this issue away, even if a few oligarchs have to be strong armed into subscribing to do so. There's too much national pride at stake for it to be allowed to fail. Yet even if I didn't think the Rosneft flotation morally indefensible, personally I wouldn't touch it with a bargepole.

j.warner@independent.co.uk

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