Scottish & Southern Energy is set to become the UK's biggest electricity distributor after agreeing yesterday to buy Midlands Electricity from its US owners in a £1.1bn deal.
The takeover is dependent, however, on bondholders who are owed £567m accepting S&SE's terms, which would only enable them to recoup 86p in the pound.
At least one bondholder told S&SE yesterday that the deal was unacceptable but Ian Marchant, the group's chief executive, said he believed bondholders would ultimately back the deal when the offer was explained to them.
S&SE has set a deadline of the end of August for completion of the takeover otherwise it will walk away, raising the prospect of Midlands being placed in administration by its two cash-strapped parents, Aquila and FirstEnergy. "Typically, prices are lower in an administration than in a trade sale, and that is something the bondholders must weigh up," Mr Marchant added.
He likened the protracted negotiations with the two US companies over Midlands to "buying a house with subsidence and negative equity from a divorcing couple".
Provided the deal goes through, then S&SE will own three electricity networks supplying power to 5.7 million customers in the north of Scotland, southern England and the Midlands. S&SE estimates that the takeover will deliver £30m of savings but it could not put a figure on how many job losses there would be.
Apart from the £567m to bondholders, S&SE is also taking on £502m of debt and paying £43m in cash for Midlands equity. The deal will double S&SE's debt to £2.3bn and slash its interest cover but Mr Marchant said it would enhance the company's earnings per share in the first year.
He added that the purchase of Midlands would probably mean that S&SE could not do another big takeover for at least 18 months but this could be because of operational rather than financial constraints.
If the deal was blocked by bondholders then the purchase of one of National Grid Transco's regional gas distribution businesses would go to the top of S&SE's buying list.
The Midlands takeover will result in S&SE paying £32m back to customers over a five-year period. There would also be £40m to £50m of one-off costs in order to achieve the efficiency savings assumed by S&SE. The only bid costs it will have is a fee, estimated at £2m to £3m, payable to SBC for the restructuring of Midlands' bonds.
The deal will reduce the number of owners of regional electricity networks to seven compared with 14 at the time of privatisation and Mr Marchant said he thought there could be scope for further consolidation. The only two networks which are individually owned are East Midlands, which is part of E.ON, and Norweb, which is owned by United Utilities - one of the failed bidders for Midlands.
S&SE announced a 6 per cent rise in profits to £630m last year after achieving £19m of additional cost savings and raised its dividend by 8 per cent to 35p a share. Its pensions deficit increased to £280m and it will also inherit a £100m hole in Midlands' pension scheme provided the takeover goes through.
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