IP prolongs Drax's agony as it matches Goldman Sachs' bid

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Prospects for Drax, the operator of Europe's largest coal-fired plant, yesterday looked brighter when one of its suitors raised its offer for the cash-strapped company.

IP improved the terms of its deal, saying it would pay up to £130m for the business ahead of a deadline of tomorrow when bondholders are due to decide whether to accept its offer or the rival bid from Goldman Sachs.

IP said when it made an initial offer in July that it would pay as much as £80m for 15 per cent of Drax's debt and 36 per cent of its equity. Goldman last week offered £130m for 21 per cent of Drax.

Drax is trying recover after a 40 per cent drop in power prices and the bankruptcy of its biggest client, TXU Europe, forced it to default on its £1.3bn debt. A spokesperson for IP said it had "tried to synthesise the best elements of the two deals currently on the table".

However, Goldman, which is already active in the UK electricity market and looking to expand its reach, maintained that its offer was "superior". "The International Power offer contains a management contract condition for Drax over the next fifteen years. Under this management contract, Drax will have limited termination rights which will result in it being very difficult for the directors to sell Drax and thus create value for all its stakeholders in the future."

IP upped the ante in its battle with Goldman as banks owed £1.3bn by Drax gathered yesterday to consider their options. Shares in IP fell 7p to 153p on news of the increased offer. Bondholders in the electricity generator met on Tuesday and its board is expected to meet today or tomorrow.

So far, all parties have agreed to stick to the deadline tomorrow imposed by Goldman and IP. But it has emerged this week that Drax might attract other offers, possibly from BHP Billiton or from Miller, McConville, Christen, Hutchison & Waffel LLC, a New York-based energy investment company.

Drax's American owner, AES, recently walked away from the plant after banks and bondholders refused to accept its restructuring offer. Drax is now under the control of independent directors.

Asset values have fallen sharply since AES bought Drax for £1.87bn in 1999. Analysts now believe the business is worth closer to £400m, though it could fetch more because it has a facility for reducing sulphur dioxide emissions.

MMC, which is setting up a European fund to buy distressed power and gas assets, increased speculation that it would enter the battle for Drax, saying it was a "target".

However it has made it clear that it does not believe it has to act before tomorrow's deadline, because the timetable was set up by Goldman and IP.

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