Michael Harrison's Outlook: Come on in, the water's still lovely all these years after privatisation

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The Independent Online

The water industry has repaid shareholders their original capital so many times since privatisation in 1989 that no one should perhaps be surprised by the latest example of largesse.

Pennon, the owner of South West Water, has turned on the taps and is handing £200m back to shareholders.

Odd, therefore, that only nine months ago South West Water was pleading poverty. It told the regulator, Ofwat, that it needed to raise customer bills by one-third if it was going to keep Cornwall's beaches clean for the next five years. Ofwat did not think it needed quite that much to finance its capital expenditure programme. But it still sanctioned a 25 per cent increase in charges in an area that already had the highest water bills in the country.

The regulator bought the argument that shareholders in the water companies could no longer afford to bear so much of the cost and customers would have to be squeezed. The industry, so the argument ran, had already achieved all the easy cost savings it could and so bills would have to start rising, rather than falling as they had done in the past. Pennon has now demonstrated that Ofwat let the industry off the hook.

There is an intriguing parallel with what happened in the electricity industry a decade ago when Northern Electric announced plans to hand back £500m to shareholders a few short months after the industry regulator, Professor Stephen Littlechild, had set new price controls for the industry. Admittedly, Northern's move was designed to thwart a hostile takeover bid from Trafalgar House whereas Pennon says it is merely trying to maximise the efficiency of its balance sheet. Nevertheless, Professor Littlechild concluded that the wool had been pulled over its eyes and reopened the whole price control issue on the grounds that there was clearly more spare cash sloshing around the industry than it had let on.

Ofwat, by contrast, appears to be quite unfazed by Pennon's announcement, suggesting that it would probably have made only a marginal difference to its calculations had it known in advance about the payout.

Pennon has tried to buy off a customer protest by announcing a one-off rebate of £20 for every household in the region - about enough to halve the increase in bills this year. But it has not been entirely successful. The local consumer council is still disgusted that the gap between charges in the South-west and the remainder of the country is big and getting bigger.

Anglian, for instance, which has already done something very similar to Pennon, by handing cash back to shareholders and loading its balance sheet with debt, is only raising prices by 7 per cent over the next five years. The result is that it will go from being the second most expensive water supplier last year to the fifth cheapest in 2010.

The objective of repaying capital is to reward investors. If Pennon is still worth as much to its shareholders after the distribution as it is now, then the regulator will have egg on his face.

Calling Branson: Please keep quiet

Take one dyslexic billionaire enjoying a nap in the sun and an 11-hour time gap and what do you get? Branson blows the gaffe on NTL bid for Virgin Mobile.

The bearded entrepreneur was taking a snooze Down Under early yesterday when he was cunningly hijacked by Radio Five Live. They phoned him on his mobile and asked what it would take for NTL's bid to gain the backing of Virgin Mobile's minority shareholders. Since they own 28 per cent and he owns the rest, Branson's back-of-a-fag packet calculation was £25m - which happens to be almost exactly the amount of cash needed to bridge the gap between the 323p NTL has offered the minority shareholders and the 355p at which Virgin Mobile shares are currently trading.

Cue an embarrassed Stock Exchange announcement from the Virgin Mobile board stressing that it has not sought to solicit a higher offer from NTL and criticism of Branson for apparently attempting to negotiate on behalf of the independent directors.

Not that they would have much to complain about. Virgin Mobile would surely bite NTL 's hand off if it were to offer 355p. That would represent a near 80 per cent premium to the price at which the company floated last year - not bad for a virtual network which owns nothing much else apart from its name and a lot of youthful but less profitable subscribers. As it is, the value of NTL's offer is currently rising anyway in tandem with its share price and is now around 330p.

For Branson, it makes only a small difference whether the bid is pitched at 323p, 330p or 355p since he has already said he will take NTL shares in return for his stake. Swapping 72 per cent of Virgin Mobile for a 14 or 15 per cent stake in a company that has sunk literally billions of pounds beneath the highways of Britain and therefore owns real assets has got to be a no-brainer.

The only risk is brand contamination should NTL continue to offer as poor a service when it starts selling broadband, television and telephony under the guise of Virgin. But Branson has lived with that before - first with Virgin Energy, which gained a terrible reputation for high-pressure doorstep selling, and then with Virgin Trains.

There is understandable angst that Branson spent nine months discussing a merger with NTL in private before the independent directors of Virgin Mobile got to know about it. But that comes with the territory when you have a larger-than-life shareholder on board. The fact is Branson is no more likely to want to negotiate a deal on behalf of the minority than he is to bulldoze them aside by accepting a low-ball offer from NTL. That would do his reputation - and his hopes of bringing other Virgin companies to the stock market - no favours whatsoever.

Fidelity, Virgin Mobile's biggest minority shareholder, is no mug and it is continuing to add to its stake at prices well above the see-through value of NTL's offer. That suggests a raised bid is not too far away. The minority shareholders should enjoy the ride and not get too stressed. As they say Down Under: No worries.

BAA's flight path into trouble

Money is clearly no object for the boys at BAA. Fresh from winning the bidding for Budapest airport yesterday with a knockout bid of £1.4bn, BAA will today spell out how it plans to spend £4bn on a new runway for Stansted airport.

The difference is that whereas BAA is buying Budapest with its own money, the Stansted runway will need to be paid for by the airlines which use it - and quite possibly some which don't. Ryanair and easyJet, the two principal operators at Stansted, have already told BAA that even the £1.75bn cost of the first phase of Stansted is way too much while £4bn is for the birds completely.

Likewise, British Airways, Virgin Atlantic and the other big carriers at Heathrow and Gatwick have warned that BAA will cross-subsidise Stansted over their dead bodies. All in all, a hard sell for BAA's chief executive, Mike Clasper - and that's before he has even begun to take on the environmental protesters who will fight Stansted all the way. For that reason, the Swampy brigade actually reckons Heathrow will get a third runway first and are today preparing to handcuff themselves to the diggers. Do they know something we don't?

m.harrison@independent.co.uk

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