Outlook: And Thus, the demerger finally came to pass

Going Underground; Princess in love
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The Independent Online

Ian Russell is sorting out ScottishPower's problem children one by one. First it was Southern Water which was loaded up with debt and then tapped for £1.7bn to help bail out other bits of the group. Then it was PacifiCorp, where a knife has been run through the top management. Now it is Thus, the group's portentously-named telecoms business, which is being refinanced and then set free to sink or swim on its own.

Two years ago, when Mr Russell raised just north of £1bn by floating a 49 per cent stake in Thus, telecoms looked like a smart business for a dull old electricity utility like ScottishPower to be in. Thus even made a brief appearance in the FTSE 100 Index. Since then, the spectacular bursting of the new technology bubble has made telecoms look more like a mug's game while the value of Thus has shrunk to a modest £350m.

In its short life Thus has already eaten its way through £600m in cash including £260m borrowed from ScottishPower and is still four years away from break-even. When the current loan from ScottishPower ran out sometime next year it would have been back cap in hand to the parent company asking for more funds.

Ridding itself of this commitment by selling off the remaining 51 per cent was never really an option because it would have crystallised a quite horrendous capital gains tax bill for ScottishPower amounting to more than the entire market capitalisation of Thus.

The clever investment bankers at HSBC have come up with an elegant solution that treats the parent and the child as evenhandedly as is possible in circumstances where separation becomes the only answer.

ScottishPower will underwrite a £275m share issue for Thus, the proceeds of which will be used to pay off the outstanding loan and provide a small amount of working capital for Thus which is being supplemented by £90m in new bank borrowings.The effect of all this fancy financial footwork will be to raise ScottishPower's shareholding in Thus to around 70 per cent. But the parent will then cut the apron strings entirely by demerging Thus into a stand alone business.

There is a small downside for the parent company in that it will no longer have any direct exposure to a business which in the long-term will undoubtedly generate a great deal more growth than electricity transmission ever could. The upside is that Mr Russell's shareholders are spared a £400m tax bill and those who want to can hang onto their stake in the telecoms business.

For the prodigal son the outcome is also mainly favourable, which is why Bill Allan, the chief executive of Thus, was looking as pleased as punch yesterday. His annual interest bill will be a fraction of its former size. But with gearing of only about 15 per cent, he should have little difficulty raising additional funds if opportunities arise.

The downside for Thus is that it no longer has a sugar daddy to turn to if the going gets very rough. There is also the risk of the share price being damaged by a flowback of stock from investors who have no interest in owning a telecoms business.But Thus may not be around long enough as an independent telecoms operator to worry about any of this. The greatest likelihood is that the demerger will act as the catalyst for long-overdue consolidation of the smaller players in the telecom market. In fact, Mr Allan's phone may already be ringing.

Going Underground

The appointment of PowerGen's Ed Wallis as chairman of London Underground is as sure a signal as any that the Government is pressing ahead after all with the Public Private Partnership for the Tube. Why else appoint a bruiser like Ed if not to rough up Ken and Kiley and drive a hard bargain at the same time with Bechtel and the other private contractors chosen to take over the network?

When Stephen Byers appeared before the Transport Select Committee a fortnight ago and let slip that the Tube might be kept in public ownership if the private sector option did not prove value for money, le tout Westminster sensed he was preparing the ground for a monumental U-turn. But the Secretary of State for Transport is nothing if not cunning. It now seems his remarks were actually designed to get Bechtel and Co to start sharpening their pencils as the detailed contract negotiations proceed.

If anyone is familiar with this type of ministerial tactic, it ought to be Ed. It was, after all, the Conservative government which threatened to sell PowerGen to Lord Hanson rather than float the business unless Ed and his team agreed to take on a suitable amount of debt.

With PowerGen about to be swallowed up by the Germans, Ed is at a loose end and still young enough to have a few interesting chairmanships left in him. In theory, his tenure will only last until London Underground becomes part of Ken's Transport for London next April and the private contractors move in. But in practice, it will almost certainly prove a longer and harder slog than that given the pace at which anything to do with the Tube moves. Younger men have been ground by the experience. Just look at Ed's predecessor, Derek Smith, who has decided that even the National Health Service will be a more comfortable billet.

Princess in love

Lord Sterling has agreed to delay the marriage of P&O Princess and Royal Caribbean until Valentine's Day. How romantic. The bans were supposed to have been read in early January so that any shareholders who knew of a lawful reason why these two cruise companies should not be joined in holy matrimony could speak their piece.

P&O has now offered to delay its extraordinary meeting for six weeks so that its other suitor – that brash perma-tanned American Mickey Arison of Carnival – can come up with an improved offer.

But Mickey is being coy and says he just wants to talk about it. He also wants to get his hands on P&O's management accounts so that he can see exactly what sort of dowry to expect before upping the ante.

Lord Sterling splutters that Mickey is only trying to spoil the Princess's big day and no lady could allow herself to be manhandled in that way. In any case he cannot solicit a higher bid because that would breach the merger agreement with Royal. The result is a stand off. Mickey could, of course, demonstrate the true depth of his love for the Princess by snapping up some of her shares in the market. After all, they are languishing a long way below the offer price made by Carnival. Come on Mickey, a gal deserves to know if she is making the right choice.

m.harrison@independent.co.uk

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