Goldman to scorch the earth for Sweb

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The Independent Online
THE FIGHT for South Western Electricity has taken on a new dimension with last week's appointment of US investment bank Goldman Sachs as an adviser to the company.

The move increases the likelihood that Sweb will opt for a "scorched earth" defence in the pounds 1bn hostile bid it faces from the US electricity concern Southern Company.

Goldman will use the expertise it gained in the US utility sector to develop a model that will stretch Sweb's gearing dramatically, far beyond the 60-80 per cent first mooted by the market when the bid was announced. Sweb could raise gearing to 170 per cent and above.

Evidence of this came in Friday's news from Northern Electric. Northern, concerned at the resumption of hostilities with Trafalgar House, said it would boost gearing to 175 per cent by March 1997, to fund a special package to shareholders worth pounds 2.50 a share. That figure is less than the 225 per cent it had proposed originally, when it faced a pounds 9.50 a share bid from Trafalgar House.

Northern's gearing was only reduced after Professor Stephen Littlechild's latest review imposed tougher price controls on the sector. Even after this package, several City analysts value Northern's shares as high as pounds 11. Few thought Trafalgar could recommence hostilities with an offer any less than pounds 9.50.

Trafalgar's chief executive, Nigel Rich, is examining Northern's package closely, but the company said there would be no rush to pronounce on its decision. It has until 10 August to respond.

Goldman Sachs has built a reputation as a defence specialist in the UK, and has been involved in several high-profile encounters. But this will be the first time it has been brought in to advise a UK client solely on its expertise in the US utility market. It boasts a top-rated utilities research team in New York.

A source close to Sweb conceded that Goldman's main role would be to explore how gearing could be expanded in line with US companies, most of which are comfortable with gearing of 100 per cent and over. This compares with the 12 per cent Sweb had at the time of its interim results in June, when net borrowings stood at a mere pounds 61.2m. That figure could rise to substantially in excess of pounds 300m, if Sweb were to go down the route chosen by Northern.

Sweb has retained Schroders as its lead adviser. Southern, the largest electricity generator in the US with a market capitalisation of over $14bn through its overseas arm, Southern Electric International, launched a dawn raid for 15 per cent of SWEB's shares a fortnight ago, at pounds 9 a share. It obtained just over 11 per cent.

Hopes of an agreed offer were short-lived, and talks were aborted after a day. Both sides claim the other was at fault. One source close to Southern said: "Sweb weren't prepared to offer any further information or reason why we should bid above pounds 9. Southern has done an enormous amount of due diligence on this, so the only option left was to bid at pounds 9."