National Grid buys US group KeySpan for £6.8bn cash

UK energy group expands in America as another famous British name falls to foreign ownership
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The Independent Online

National Grid, the owner of Britain's gas and electricity transmission networks, yesterday became the third largest energy supplier in the US after buying one of America's leading gas distributors in a £6.8bn cash deal.

The debt-financed acquisition of KeySpan, which is based on the north-eastern seaboard, is Grid's fifth US takeover since 2000 and means that it will now make more of its profits in America than the UK.

Roger Urwin, Grid's chief executive, denied that the move was a defensive one to protect the company from being taken over itself as the wave of consolidation sweeping through Europe's energy sector gathers pace. He also rejected suggestions that Grid had been forced into buying US businesses as a "second best" option because of its inability to penetrate "Fortress Europe".

Speaking as Gaz de France and Suez formally unveiled their controversial €72bn (£50bn) merger, Mr Urwin said: "This is not a defensive move in the slightest and has nothing whatsoever to do with what is happening in Europe. We would love to do something in Europe but the opportunities are few are far between. There is not a clear value-creating deal to be done."

Including its earlier US deals, the KeySpan takeover will take the cost of the Grid's American acquisition spree to nearly £16bn. When the KeySpan deal is complete early next year, Grid's borrowings are likely to be close to £18bn.

Steve Holliday, who takes over as Grid's chief executive at the end of the year, signalled there was more American expansion to come as the company added to its gas distribution business. He did not rule out moving beyond the north-east of the US, which Grid has made its home since the initial £2.6bn purchase of New England Electric System six years ago.

This latest deal will increase Grid's US customer numbers to 7.7 million - making it the country's third largest gas distributor and seventh biggest electricity supplier. KeySpan is the biggest gas supplier in the north-eastern US, with 2.6 million customers in New York, Massachusetts and New Hampshire. It also has an electricity transmission and distribution business in Long Island serving 1.1 million customers and 6,700 megawatts of electricity-generating capacity. Grid is paying $7.3bn or $42 a share for KeySpan's equity - a premium of just 2.5 per cent to its 12-month high - and assuming a further $4.5bn of debt.

Mr Holliday said Grid would save $200m a year by combining KeySpan with its other gas and electricity businesses in the region and said the deal would add to the group's earnings in the first full year after completion. He also highlighted the scope for expansion, pointing out that only 37 per cent of homes in Long Island and 50 per cent in New York were connected to the gas mains.

Grid is one of the very few UK utilities firms to have made a success of overseas expansion and now has a market capitalisation of £16bn. Together with its borrowings since the KeySpan deal, any predator would have to pay at least £35bn to acquire the company.

However, Mr Urwin resisted the temptation to characterise Grid as the UK's "national champion" pointing out that E.ON of Germany could have bought the company for cash before deciding instead to launch a €29bn offer for Endesa of Spain. He also predicted that the frenzy of merger activity taking place across Europe was likely to spur the other big German utility, RWE, into action.

Meanwhile, there was no sign of any let-up in the war of words between France and Italy over the Gaz de France-Suez merger - a tie-up designed to thwart a counter bid for Suez from Italy's Enel.

"This is a very ugly sign for Europe because it wipes out the reason we are together in the first place," said Giorgio La Malfa, Italy's minister for European affairs. "Europe is closing up. It has a single currency but it does not have a single market."