Energy Group falls to pounds 3.7bn US bid

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The Independent Online
Eastern Electricity yesterday became the eighth regional power supplier to fall under American control after its parent company, Energy Group, succumbed to a pounds 3.7bn bid from the US utility PacifiCorp. The takeover will create a combined power giant with debts of nearly $16bn (pounds 9.8bn) financed partly through junk bonds.

Although PacifiCorp is planning a series of asset sales which combined with cash in Energy Group's balance sheet will reduce indebtedness to $12bn, the business will still have a conventional gearing of about 300 per cent.

The bid, values Energy Group at 695.5p a share compared with the 525p they were floated at when the business was demerged from Hanson in February. The shares lost 2p to close at 646p - 50p below PacifiCorp's offer price - on worries that the bid could be blocked for political reasons.

Apart from Eastern, which is also Britain's fourth biggest electricity generator with 10 per cent of the market, Energy Group owns Peabody, the largest coal producer in the US.

Derek Bonham, executive chairman, will make pounds 632,000 out of the 90,870 Energy shares he owns but none of the directors are expected to make big gains out of the long-term incentive schemes operated by the company.

Mr Bonham and John Devaney, chief executive of Eastern, said the Energy Board had been unanimous in recommending the bid to shareholders even though it had snuffed out the company's independence after only four months. Both have been asked to join the board of PacifiCorp, which is based in Portland, Oregon on the US West Coast.

Mr Devaney also said he saw no case for regulatory or political intervention since the bid did not raise any competition issues and seven other takeovers of regional electricity companies by US utilities had already been waved through.

The bid, which involves PacifiCorp paying pounds 3.7bn in cash for Energy and taking on pounds 1.3bn of net debt will be funded with the aid of a pounds 4bn facility underwritten by Goldman Sachs, Citibank and JP Morgan.

PacifiCorp has $6bn of debt on its own balance sheet, and will take on a further $9.8bn through the acquisition. Of the total financing required, $1.5bn is in the form of senior notes with a double B credit rating otherwise known as junk bonds.

PacifiCorp's chief financial officer, Richard O'Brien, stressed yesterday that the debt would be held by the US parent company and not loaded into Energy Group adding that it would attract strong credit ratings because of the group's cash generating ability.

The company plans to reduce its debt by selling off its telecoms business, Pafific Telecom, for $1.5bn and further asset sales of financial services businesses and an independent power company.

Mr O'Brien said that PacifiCorp had no plans to sell any of Energy Group's assets in the UK nor was there any threat to the 14,000 employees of Energy Group.

The combination of the two businesses will create a grouping with total assets of $25bn, sales of $11.5bn and 26,000 employees. But there is virually no overlap other than in coal because PacifiCorp has no UK presence. Its main business is supplying 1.4 million domestic electricity customers in seven western states including California, Oregon and Washington.

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