Nomura pulls out of Energy bidding over Peabody worries

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The Independent Online
Nomura, the Japanese investment bank, last night pulled out of the bidding for Energy Group, after uncovering huge liabilities in its US coal business, Peabody.

It insisted that the decision to withdraw was based solely on price and not the prospect of a Nomura bid being blocked by the regulatory authorities.

Nomura sources claimed the bank had uncovered liabilities of some $130m (pounds 81m) a year in Peabody, the largest coal producer in the US. The index- linked burden related to long-standing health care schemes for miners.

"If the price of coal dropped by just 10 per cent it would wipe out Peabody's profits," said a source last night, adding that Eastern Electricity was the "real jewel in Energy Group's crown".

The move would in effect reduce the contest for Energy Group to a two- way fight between the US power companies, PacifiCorp and Texas Utilities.

PacifiCorp last week came back with an agreed 765p-a-share offer for Energy, valuing the business at pounds 4.06bn, after being cleared to bid again by the Monopolies and Mergers Commission.

Sources said Nomura had been eyeing a lower bid at 760p to 763p just before PacifiCorp announced its offer. However the bank decided even this figure was not justified by the new information on Peabody's liabilities.

Nomura's plan was to split Energy into UK and US companies, which would be returned to their stock markets with separate quotes.

The bank was negotiating a sale of Peabody to Lehman Brothers, the investment bank, for around $2.5bn. Lehman is believed to have pulled out of a deal, though it was unclear whether the US bank had also identified Peabody's healthcare liabilities.

The implication that PacifiCorp is overpaying for Energy Group is likely to put pressure on Texas, the Dallas-based utility which is still pondering whether to make a higher bid for Energy Group. PacifiCorp sources rejected Nomura's claims last night, insisting the utility was aware of the liabilities.

Nomura's interest in bidding cast a spotlight on Guy Hands, managing director of its Principal Finance Group, who reputedly earns pounds 40m a year, and the methods the Japanese company would have used to finance any offer.

Last night, Mr Hands said claims that Nomura's bid would not clear UK regulators were "ill-informed". He said Nomura's bid would have been viewed in the same light as US offers by UK regulators. It emerged that Nomura was not planning to fund the acquisition by issuing bonds to refinance the debt, the method used by Mr Hands in other deals.

Instead Nomura would have used conventional bank debt, plus a "substantial" injection of the bank's own resources in order to convince regulators that the deal did not use esoteric financial engineering.

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