Focus on the risks of Gas

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The Independent Online
British Gas is likely to find itself plunged into controversy again today as it publishes its long-awaited annual report giving full details of the cost of employing chief executive Cedric Brown and the rest of his board.

But it is takeover speculation, rather than executive pay, that has been exciting watchers of the £13bn gas conglomerate over the past few days.

The rumours have been good for a 13p rise in the shares recently, although they gave back some of the gains yesterday, ending 3.5p down at 296p.

Much of this has been brushed aside as pure froth by analysts, but a few are likely to be surreptitiously dusting down break-up valuations done 18 months ago when it looked as if the Monopolies and Mergers Commission might call for the dismembering of British Gas.

Although that threat passed, estimates of the company's value to an asset stripper topping 400p a share now look optimistic in the light of the regulatory quagmire in which Gas has subsequently landed.

The Gas Bill now passing through the House of Commons is set to open up the market to all comers. It will also force British Gas to run its pipeline and storage operation - now known as TransCo - at arm's length for the benefit of all participants in the liberalised market.

The measure will give large discretion to the regulator at the Office of Gas Supply, who will fix both the rate of return for TransCo and the final price charged to the consumer through the RPI-X formula. Offer probably has at least a further 18 months to make up its mind on both issues.

This makes it extremely difficult to put any values on the present business, with estimates for the more easily appraised exploration and production side ranging from £4bn to over £6bn. Simon Flowers at NatWest Securities, author of the upper-end forecast, is one analyst prepared to stick his neck out, suggesting TransCo could be worth £7bn, with the trading arm and other businesses adding £1.5bn or so to make a grand total before debt of around £15bn.

That would represent up to 350p a share, but would-be arbitrageurs should focus on the risks. Quite apart from its huge size and the regulatory doubts, any bidder might find little more fat to remove from British Gas, which is expected to be half way to its target of cutting £600m from costs by the end of this year.