The great sell-off stakes...and the handicaps hindering the state sale of the Tote and our nukes

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The Independent Online

Gordon Brown has made no bones about it: the great sell-off is under way. In April's Budget, the Chancellor confirmed that a multi-billion-pound portfolio of assets would be privatised, giving the private sector access to some major businesses while bolstering the Treasury's coffers. Around £6.3bn worth of assets were sold last year; that figure is set to rise to £30bn by 2010.

A Treasury spokesman said he expected a detailed list of the businesses earmarked for sale to be unveiled in this November's pre-Budget report (PBR). But work has already started on some of the biggest assets, and progress is not as smooth as it could be. So ahead of the PBR, and of some key developments next month, The Independent on Sunday looks at what's up for sale - and the pit- falls that are already appearing.

The Tote

Fittingly for a bookmaker with such close links to the racing industry, the privatisation course confronting the Tote has plenty of hurdles.

Founded in 1929 to offer pool betting, the Tote grew steadily through the years and now boasts around 540 shops and annual turnover of more than £2bn. But it still continues to give a chunk of its profits to racing, and it was this that meant the Government's manifesto pledge to sell was never going to be easy to put into practice.

The original plan was to sell the Tote for a knock-down price of around £200m to the racing industry, allowing the sport to retain control of the business and hang on to the cash it generated. But this thinking was naive, with the European Commission immediately expressing concern in private that the deal contravened state aid rules. So the Government withdrew the idea and returned to the drawing board.

The next suggested solution was still to sell the Tote to the industry, but at a market value of around £400m. The Department for Culture, Media and Sport (DCMS) confirms it is in talks with a consortium known as the Racing Trust, though it declines to say anything more.

The good news is that the EC has informally indicated it will have no problems with this deal.

However, there is growing speculation that all is not well within the trust. The DCMS refuses to confirm the identities of the trust's members but it was widely thought to comprise the Racecourse Holdings Trust, part of the Jockey Club, and racecourse owners Arena Leisure and Northern Racing. The three own half of the country's 59 tracks. A number of private investors are also believed to be involved with the trust.

But earlier this month Northern Racing said it had pulled out, raising fears that the trust was not in a position to make an offer, despite the Government pushing for deadlines to be met. The trust is also thought to be bulking over the price tag.

If this deal fails, it will have far-reaching consequences. Most believe the Government's hoped-for plan, that the Tote will be sold to racing, will have to be abandoned and the business sold on the open market. Those likely to be interested include bookmaker Coral (its larger rivals William Hill and Ladbrokes are out of the running because of competition issues) and a variety of private equity houses. But an open sale will mean that the cash the racing industry has enjoyed from the Tote since the 1920s is no longer secure.

BNFL

Since its inception in the 1950s, the civil nuclear industry has been controlled by Government. Until recently, a sale of the companies in the sector would not have attracted much interest; they rarely made a profit. But the global renaissance of the industry, driven by soaring energy demands, means Mr Brown can now cash in the UK's atomic chips.

Any sell-off, however, will be complex. The holding company for most of the UK's nuclear assets is British Nuclear Fuels (BNFL). It has three main businesses, which the Government is selling off piecemeal.

Most valuable is BNFL's Westinghouse division in the US, which designs and services reactors. Its £3bn sale to Japanese firm Toshiba is due to complete next month. Westinghouse was acquired by BNFL in the 1990s, and that it was not a product of the UK's messy nuclear past has helped in securing a quick sale.

The same cannot be said for British Nuclear group. BNG manages the sprawling site of Sellafield in Cumbria, which has a number of ageing plants and will eventually account for half the UK's estimated £70bn of clean-up costs as plants are decommissioned (allowing new ones to then be built).

Sellafield is actually owned by a separate state-run body, called the Nuclear Decommissioning Authority (NDA). And just to complicate matters further, BNG also owns a separate international decommissioning business and has a one-third stake in the Atomic Weapons Establishment (AWE), which makes warheads for nuclear weapons.

BNFL wanted to sell off BNG in its entirety. But the NDA became concerned that it would be too difficult to find a suitable buyer for all of BNG's businesses. The sale, due to begin in the autumn, was stalled and a crisis meeting was held last week.

Following this, its been decided that BNG will be broken up, with its £100m international clean- up business and its AWE stake sold individually. But the sales are some months from getting under way.

The NDA will then run a separate competition for the next contract to operate Sellafield, beginning in 2008 and worth £5bn.

The final BNFL asset is its one-third stake in Urenco, worth at least £2bn, which purifies uranium so it can be used in nuclear fission. The company enriches around a fifth of all the uranium for nuclear reactors, and demand will soar as new reactors are built. Yet use of the technology is heavily controlled (as it can also be used to make nuclear weapons), so Urenco has little competition. According to one utilities banker: "The potential of Urenco is breathtaking. When the stake goes on the market, there will be a line of bidders beating a path to BNFL."

But nothing is ever that simple at BNFL. To prevent nuclear technology from falling into the wrong hands, all investors must agree any sale, and BNFL's German and Dutch partners in Urenco are blocking its attempt to offload its stake. They are supposedly concerned that national security could be compromised, though there are plenty of willing takers - such as Westinghouse or French utility giant EDF - in "friendly" countries.

It is thought that BNFL's partners are more interested in buying out the stake themselves, but only at a reduced price. "They've basically got BNFL over a barrel," is how one industry source sums it up.

British Energy

The final piece in the nuclear jigsaw is the Government's 65 per cent stake in the listed nuclear generator British Energy, which produces around a fifth of the UK's electricity. The Treasury plans to offload a third of this stake, and so far it appears to be going to plan. Banks are expected to start marketing the shares, worth around £2.5bn, in September and analysts expect them to be snapped up - four years after British Energy almost went into administration.

At that time it had been hit by low electricity prices, forcing it to sell power at a loss. Over the past two years, though, prices have doubled and nuclear power is at last showing a profit. With the high cost of oil, the generation of electricity at gas-powered stations has become more expensive, while taxes are starting to make dirty forms of generation like coal too expensive. So British Energy is, potentially, a good bet for investors. Unlike coal, nuclear power produces few carbon emissions and is cheaper to produce.

If the company could cut down on the number of shutdowns of its plants needed for maintenance, it would be making even more money.

The irony, of course, is that it was privatised a decade ago but had to be bailed out by the Government in 2002, resulting in the state's 65 per cent stake. Maybe this time British Energy will be sold and stay sold.

Also on the block...

Of course, these are not the Government's only assets. A report last year, for instance, found there were swathes of radio frequencies, called "airwaves spectrum", that could be sold off as only a small amount were used for government purposes such as defence, maritime and emergency services.

The telecoms companies will be eager bidders if and when this happens, although Treasury insiders say no one is expecting the same level of interest that 3G licences generated in 2000. Then, with tech fever holding sway, Mr Brown topped up his coffers to the tune of £22bn.

Other sales, meanwhile, have already completed, such as that of Qinetiq. The Government was already under fire for selling a stake in the Ministry of Defence's former defence laboratories to the Carlyle Group four years ago - a move that netted the private equity firm £380m when the business was floated this year.

Its shares have fallen since its market debut, although it still boasts a value of xx. But there is growing disquiet about Qinetiq's close links with the Government, which retained a 19.3 per cent stake. One Conservative MP recently accused the Government of having a "clear conflict of interest" over a £10bn PFI military-training contract that Qinetiq is bidding for as part of a consortium.

Yet problems such as this, and all the other ones that lie ahead, have not deterred the interest in the state's assets. The Chancellor will give us more details in November, but among investors and deal-doers, they are already being watched like a hawk.

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