Government pours cold water on Centrica-BE merger plan

The Government appeared to pour cold water on Centrica's revival of its proposed all-paper merger with British Energy yesterday by coming out strongly in favour of the languishing EDF deal.

After speculation at the weekend that Centrica was to renew is proposition for a merger after the collapse of the French take-over talks last week, the comp-any said yesterday that it was in discussions with a third party with a view to taking a minority ownership position in British Energy, subject to various conditions – one of which is that the third party successfully acquires the nuclear group.

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Although not confirmed by Centrica, it is widely understood that the third party in question is EDF, which is smarting after its 765p-per-share offer for British Energy was vetoed by two major shareholders –Invesco and M&G – last week. But Centrica's statement also includes possible actions in the event that there is no third party British Energy deal. "Alternatives may include ... long-term power off-take arrangements [to buy electricity generated by BE plants], Centrica participating in British Energy's potential new nuclear partnerships, or a possible merger of Centrica with British Energy," the company said.

The Government's response was lukewarm at best, emphasising that the EDF takeover is still considered the best outcome. A spokeswoman said: "The Secretary of State said on Friday that the EDF deal would have been a good fit – that remains our view and the parties are still in discussion. Our clear preference is for a business with experience of new nuclear build."

Centrica first raised the possibility of a merger earlier this year, with the spin that it would offer a "British solution". But the proposal floundered in the face of the possibility of hard cash from European rivals including RWE, Iberdrola and Vattenfall. EDF became the front runner in May with a rejected 680p-per-share offer.

British Energy runs eight nuclear power stations, which produce around a sixth of the country's electricity, and is central to the Government's strategy for expansion of the nuclear sector to meet rising energy demands. Delays to the sale could be a major drag on the plans. The target is for eight new nuclear power stations, the first of which could come on stream in 2018. But there is also major decommissioning work.

A number of Centrica's major shareholders also have positions in British Energy, and Centrica's chief executive, Sam Laidlaw, is expected to sound out views on a merger this week. But for any merger scheme to go ahead, it will need support from the Government, which owns some 35 per cent of British Energy.