Go-ahead for pounds 1.9bn power takeover

POWERGEN IS today expected to agree the sale of 4,000 megawatts of generating capacity, in return for government approval of its pounds 1.9bn takeover of East Midlands Electricity.

This is twice the amount of capacity that the generator initially volunteered to sell and will mean disposing of two of its five coal-fired power stations.

In his second major competition decision in as many days, Peter Mandelson, Secretary of State for Trade and Industry, is today expected to agree not to refer the PowerGen deal to the Monopolies and Mergers Commission subject to undertakings. These are likely to include conditions relating to ring-fencing and cross-subsidies, as well as the requirement to dispose of stations.

The move will come as a boost to the coal industry, which was further bolstered by news yesterday that Eastern Group is to invest pounds 100m on environmental clean-up kit for its West Burton station in Nottinghamshire to allow the plant to continue burning British coal.

Mr Mandelson's ruling could also clear the way for a spate of further deals involving vertical integration between electricity generators and suppliers. Southern Electric and Scottish Hydro-Electric have already announced plans for a pounds 5bn merger, and the nuclear generator, British Energy, is one of the front-runners to take over London Electricity.

The electricity regulator, Professor Stephen Littlechild, had wanted the two big fossil-fuel generators, National Power and PowerGen, to dispose of half their coal-fired stations - equivalent to 10,000 megawatts of coal-fired capacity to increase competition in the generating market.

He will have to settle for a lower figure than that but it will still permit three or four new players to enter the market. Negotiations over how much plant National Power must dispose of are continuing but it will be not less than 4,000 megawatts.

A range of prospective bidders have been lined up to take power stations off the hands of the two generators.

John Devaney, the former chairman of Eastern Group, was considering a bid for one of PowerGen's stations. Other potential purchasers include Mission Energy of the US, which bought National Grid's pumped storage power stations, and Southern Company of Georgia.

When PowerGen announced the East Midlands deal in June, it said that it had already received 10 approaches to buy generating capacity. The Ferrybridge plant in Yorkshire is one of the two stations likely to be sold and PowerGen believes it will raise pounds 500m.

The merger will create a combined group with sales of pounds 4.1bn and pre- tax profits of pounds 623m. It is expected to yield savings of pounds 30m a year.

Ed Wallis, the PowerGen chairman, took a risk that the deal would not be blocked by the MMC by making the takeover unconditional. PowerGen completed the purchase and handed over the money to East Midlands' US owners, Dominion Resources, two months ago.

The sale of two power stations will reduce PowerGen's portfolio to 10,000 megawatts, of which 6,000 will be coal fired. National Power has about 16,000 megawatts of capacity.