Energis plans pounds 1bn flotation
Shareholders to be rewarded as National Grid prepares to sell holding in telecoms company
Sunday 17 August 1997
National Grid is expected to sell a minority stake in Energis, which started competing with BT and Mercury in 1993. The transaction would value Energis at between pounds 800m and pounds 1.2bn.
Paul Marsch, telecoms analyst at Morgan Stanley, said a share sale would enhance National Grid's share price in the same way as "the flotation of Orange substantially increased British Aerospace's share price" in 1995.
It will come as welcome news to the thousands of shareholders in regional electricity companies who were given free shares in National Grid when it was demerged in December 1995.
National Grid, which owns the electricity transmission system in England and Wales, is currently valued on the stock market at pounds 4.4bn after a 30 per cent rise in its share price this year to 256p on Friday - up 6p against a falling market.
"Flotation has always been one of the options for Energis. It has reached the position where it is an entirely realistic option," said Peter Gavan, director of corporate affairs at National Grid, adding that the board has yet to sign off on the plan.
Analysts are divided over how good an investment Energis would be. The company has, they said, underestimated costs and overestimated its ability to win customers.
In the company's 1992 business plan, drawn up by Coopers & Lybrand, it expected to make its first profit in the year to March 1996. In fact, the company made an operating loss of pounds 54.2m and does not expect to break even until the turn of the century. Instead of a projected pounds 340m, Energis revenues were pounds 97.1m.
Energis has also failed to fulfil its stated goal of finding an international partner. Its chairman, Gordon Owen, the former chairman of Mercury Communications, said in June 1996 that the company was in talks with international companies and that it planned to announce a partner within a year. Companies it talked to included AT&T, but no deal has been reached.
A month after that, Energis chief executive Mike Grabiner said National Grid would look to sell if the UK phone company's long search for a foreign strategic partner was not successful.
Yet Energis has spent pounds 575m on building a more advanced telecoms network than its rivals and was able to do so in only 19 months by stringing cable along its electricity poles. Its network is based on "synchronous digital hierarchy" technology - a broadband service that can carry millions of bytes of computer, voice and video information simultaneously.
James Dodd, telecoms analyst at Dresdner Kleinwort Benson said companies offering broadband advanced services will see bigger margins in future than those whose main business is selling ordinary voice calls.
"By 2000, we estimate that the value of the plain old telephone service operators may have grown, but only at a rate of around 3 per cent compound," said Mr Dodd. "The broadband sector, we believe, will see the phase of highest growth of around 20 per cent due to the arrival of the synchronous digital hierarchy network operators."
According to a report by HSBC James Capel, Energis has already won the lion's share of traffic from Internet companies, a market that is set to explode over the next few years.
According to International Data Corporation, 35 million individuals and businesses in Europe alone will use the Internet by the turn of the century, compared with the current 8.9 million.
Some analysts expect Energis to be absorbed into a larger international group. "They are going to be an attractive target to companies like Deutsche Telekom who want to expand overseas," said Andrew Entwhistle of Analysis, a Cambridge telecommunications consultancy.
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