National Grid merger with Lattice will create £30bn utilities powerhouse

National Grid and Lattice, the owner of the Transco gas pipeline network, are merging to create a UK national champion in gas and electricity transmission with its ambitions firmly set on international expansion.

The combined group, to be known as National Grid Transco, will be Britain's biggest utility with a market capitalisation of £15bn, 30,000 employees and £25bn of assets.

Although the all-share deal was described yesterday by the two groups as a nil-premium "merger of equals" it, in effect, amounts to a National Grid takeover of Lattice. National Grid shareholders will emerge with 57.3 per cent of the shares in the enlarged company and Lattice shareholders the remaining 42.7 per cent.

City reaction to the deal was positive with Lattice shares rising 11 per cent to close at 192p and National Grid ending 3 per cent higher at 505p.

The deal was planned in great secrecy after an approach from National Grid to Lattice in February and discussed in detail over a dinner five weeks ago between the chairman of National Grid, James Ross, and his counterpart at Lattice, Sir John Parker.

It will require approval from the energy regulator, Callum McCarthy, and the Office of Fair Trading. However, the two companies said that Mr McCarthy, the chief executive of Ofgem, had raised "no issues of principle" when briefed last week on the proposed merger. Patricia Hewitt, the Secretary of State for Trade and Industry, was also informed of the impending deal by Mr Ross. "We do not anticipate any regulatory or competition issues which would prevent the merger going ahead," said Steve Lucas, finance director of Lattice.

The deal will bring together Transco, which owns the UK's national and local gas distribution networks, and National Grid, which owns the UK's high-voltage electricity transmission network.

Cost savings of £100m are expected in the first full-year of operations, although initial job losses will be limited to the closure of one of the two London head offices with about 100 redundancies. There will be further job reductions with the merger of some functions at National Grid's Coventry headquarters and Lattice's Solihull headquarters.

The two companies also pledged that safety would not be compromised in any way – a sensitive issue given the shortage of engineers at Transco, which has led to concerns in the past about the upkeep of the gas network.

Although the bulk of the combined group's assets will be in the UK, the focus of expansion will be in the US, where National Grid has already spent $13bn (£9bn) on acquisitions in New England and New York state and now has transmission and distribution networks serving 3.2 million electricity customers and half a million gas customers. Mr Lucas, who will become finance director of the combined group, said it would have at least £3.5bn of firepower to make a further "material" acquisition in the US.

The new group, will be chaired by Sir John while Roger Urwin, chief executive of National Grid, will become chief executive. Other executive board members will be drawn evenly from the two companies. Stephen Box, National Grid's finance director, is retiring because of ill health.

Mr Urwin rejected suggestions that a takeover of Lattice amounted to a U-turn in strategy by National Grid, which has been seeking to reduce its reliance on the heavily regulated, low growth domestic utility market. He said the merger would give the combined business the financial strength to expand more rapidly in the US and additional expertise in running gas distribution networks in overseas markets.

The two groups are hoping to complete the deal by October. A break fee of £60m is payable if either company withdraws from the merger. Fees for the six sets of financial advisers working on the deal are also put at £60m.

The new company will have an enterprise value of just under £30bn made up of £15bn in equity and £14bn of debt and will have gearing of about 50 to 60 per cent, keeping it well within the debt ratios required by the US Securities and Exchange Commission for public utility companies.

But Mr Urwin conceded that National Grid's headroom for taking on more borrowings to finance further US takeovers would have been limited had it not done the Lattice deal. It was recently forced to take a £750m write-down in the value of its Energis stake and its Latin American telecoms ventures and is expected to announce the partial sale or complete withdrawal from its loss-making Brazilian telecoms joint venture Interlig next month.

Lattice's fledging fixed-line telecoms network, 168k, will be sold off. But the radio masts businesses of Lattice and National Grid will be pooled to create the UK's third-largest independent provider of communications towers for mobile telephone operators.

The merged group has pledged to pursue a progressive dividend policy by sticking to National Grid's existing pledge to increase dividends in real terms by 5 per cent a year.

BULKING UP TWO FORMER STATE-OWNED MONOPOLIES COME TOGETHER FOR WARMTH

It is not often that a pair of dull old utilities cause such a stock market stir but in many respects the merger of National Grid and Lattice is a deal that was waiting to happen.

Both companies operate national transmission networks and both are monopoly businesses. So while they have a lot in common in terms of the way they are run, there is no overlap in their activities to arouse the concerns of regulators.

National Grid, which operates the network of electricity pylons and high-voltage transmission wires, was privatised in 1990 at the time of the flotation of the regional electricity companies. It was demerged as a separate business five years later in a deal which turned its then-chairman David Jefferies into a multimillionaire.

National Grid was also the parent company of the telecoms company Energis and raised £2bn selling down its shareholding and using the proceeds to invest in overseas electricity and telecoms ventures.

Lattice came into being 18 months ago and is the product of the second demerger of the former British Gas empire. The owner of the gas network operator Transco, it was separated from the international oil and gas activities of BG in October, 2000.

Lattice has been without a chief executive since Phil Nolan quit unexpectedly last summer but will shortly have a new one in the shape of National Grid's Roger Urwin.