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Hasty nuclear sell-off could end in tears

COMMENT: Advisers claim it is now possible to write a respectable assessment of waste treatment liabilities in a stock market prospectus.
The best that can be said about nuclear privatisation is that the chances of it succeeding at a positive rather than a negative price have much improved over the last year with the decision to exclude the Magnox nuclear stations. These are the older generation power plants that are nearing the end of their useful lives, and are about to face the uncertain cost of decommissioning.

They will probably be buried for 135 years under mounds of concrete and earth until their radioactivity has cooled enough to make it possible to pull them apart.

The awe-inspiring accounting, environmental and engineering problems of dealing with the Magnox plants forced the Government to withdraw nuclear stations from the electricity privatisation five years ago. Without them, the nuclear industry's balance sheet will look a lot more respectable.

The cabinet committee that gave a qualified go-ahead to privatisation on Wednesday had no other choice but to leave Magnox stations with the Government.

Of the £11bn of waste treatment and decommissioning provisions in Nuclear Electric's 1994 accounts, £8.3 bn relates to Magnox plants.

The key to reassuring investors that the industry is privatisable is that the rest of the power stations the company owns have much longer operating lives ahead of them - 10 to 20 years for the five advanced gas cooled reactors and perhaps 35 years for the new pressurised water station at Sizewell in Suffolk.

That gives a decent period to build up realistic provisions against decommissioning costs in the light of experience with the Magnox stations as they close, one by one, over the next decade.

There may well have to be a separately run decommissioning fund into which provisions are put by a privatised nuclear industry, to ensure the costs can be met if the company goes bust over the next century. This is a novel though not unacceptable concept for investors to get their teeth into. In essence, it would run very much like a pension fund for retired nuclear plants, and is a perfectly feasible idea that both Nuclear Electric and its environmental opponents now back.

There has also been progress on a second costly liability that was frightening investors. What happens if spent fuel treatment at the British Nuclear Fuels plants at Sellafield proves more costly than expected?

The Government flatly refused to underwrite the liability, but after protracted haggling BNFL has agreed to split any extra costs with Nuclear Electric and Scottish Nuclear, the smaller of the two atomic power companies.

The details are as yet unpublished but are believed to leave the bulk of the risk with the state-owned BNFL. Advisers claim it is now possible to write a respectable assessment of waste treatment liabilities in a stock market prospectus.

Oddly enough, these rather technical issues figure higher on the list of investor concerns than the risk of a Chernobyl-style explosion. The reason is that liability is capped at £300m under a European Union agreement, beyond which costs are met by European taxpayers. A privatised company could easily find insurance cover for the first £300m.

There are other risks, not least the cost to a nuclear company of down time after a serious accident or of withdrawal or changes to an operating licence because of nuclear regulatory concerns - what you might call the Littlechild factor at the Nuclear Installations Inspectorate. But these are the risks borne by any large capital-intensive investment - Eurotunnel, to name but one - and can be factored into the price in a sale.

The real question is why the Government is bothering at all with privatisation of nuclear power at the moment. Despite Nuclear Electric's protestations that it can finance another reactor complex at Sizewell once it is in the private sector, few in the City give it much chance of getting the project off the ground.

Nuclear electricity is now more competitive than it was, but still requires subsidy and there is a suspicion that another Sizewell will be financeable only if the electricity market is rigged in its favour, not something the Government can do lightly. As for the marketing of privatisation stock, it will stir up a hornest's nest in the environmental and anti-nuclear lobbies.

There can only be one reason for pressing ahead so fast. The £2bn the sale might fetch is enough to lop a penny off income tax before the next election. Hasty privatisations nearly always end in tears.

Richemont is getting the better half of the bargain

Those who invest in companies majority owned by someone else always do so at their peril; Rothmans looks like proving no exception. With the now customary outburst of insider dealing that takes place ahead of most substantial takeover bids, Richemont yesterday announced buyout terms for the minority interest in Rothmans. Is Richemont offering a fair price for the 39 per cent of Rothmans it does not already own? The independent directors, led by no less a City figure than John Craven of Morgan Grenfell, say so, and it seems we must believe them. Rothschilds, which advised the directors, agrees.

While it is true that the offer gives a 28 per cent premium to Rothmans' closing price on Wednesday, it hardly fully reflects the value of the deal to Richemont. The £1.6bn it is paying for the stake will be funded very quickly through Rothmans' cash pile and cash generation of £200m a year plus. Richemont immediately gets its hands on £550m of ready money - Rothmans has even more net cash but some of that belongs to the shareholders in its 50-per cent-owned subsidiaries in Australasia.

Richemont insists that this was the most efficient and effective way of returning the company's value to minority shareholders. It is also the fairest, Richemont's advisers claim, since it delivers an immediate premium evenly to all shareholders.

Even assuming this is true, Richemont still seems to be getting the better half of the bargain. Those who invested in Rothmans did so for the very cash flow that Richemont will now be able to tap at will.

Tobacco is a mature and declining business which these days needs little if any investment. Though its long-term death is assured it has many years left of making hay. All that benefit will now go to Richemont, which, be assured, is not bidding out of any altuistic feelings towards minority shareholders. Not that they are in any position to argue. With Richemont firmly in the driving seat, there is no chance of a bidding war developing. Nor with the independent directors in approval, is there any chance of extracting better terms by other means.