Northern Electric sparks pounds 650m US bid
Tuesday 29 October 1996
The whole sector had been gripped by intense takeover speculation for several days, sending share prices soaring, but Northern Electric had been considered by most City analysts to be the least likely target.
Rejecting the bid last night, Northern's management, led by chairman David Morris, who successfully fended off last year's pounds 1.2bn attack from Trafalgar House, was preparing for another long battle and did not rule out the possibility of further substantial giveaways for shareholders. "We will consider whatever is appropriate by way of giving value to our shareholders," Mr Morris said.
The bid was launched by CE Electric, a British company formed by US power generator CalEnergy of Omaha, Nebraska. CalEnergy has assets worth $3.5bn (pounds 2.2bn) in power projects in the US, the Philippines and Indonesia. The other CE Electric shareholder, with a 30 per cent stake, is Peter Kiewit Sons, a private US construction and mining firm which owns 33 per cent of CalEnergy.
CE Electric is offering 630p a share in cash for Northern shares, valuing the company at pounds 651m. On top of this CE would pay 103p in cash for Northern's preference shares, worth pounds 115m, which were distributed to investors as part of its Trafalgar bid defence.
It also emerged that CE had paid pounds 81m for a 12.72 per cent stake in Northern in a dawn raid. By the close of stock market trading Northern's share price had jumped by 25 per cent, to 648p from 520p on Friday.
Shares in other regional electricity firms also surged ahead, with London adding 18.5p to 608.5p and Southern Electric rising by 17.5p to 647.5p. However shares in East Midlands slipped back from 560.5p to 545.5p, after the much-touted takeover bid by a US utility group failed to materialise.
Explaining the reasons for the offer, David Sokol, CalEnergy's chairman, said bidding for Northern was an attempt to move from power generation into the regulated business of distributing and supplying electricity to customers. The aim would be to expand into other parts of the UK domestic electricity market when it was opened to full competition in 1998.
He claimed this made his bid different from the largely financial rationale of US utility companies which bought other British RECs. "This is a strategic decision because we are a generating company and we want to acquire the skills of distribution and supply," he said.
Mr Sokol said he had spent several weeks looking at the other RECs which are still separately quoted, including East Midlands, which has been frequently tipped as the most likely takeover candidate. Northern was chosen because the Trafalgar bid had thrown up an "enormous amount of data" about its operations.
CalEnergy said it had informed UK regulators of its intentions and did not anticipate a referral to the Monopolies and Mergers Commission. Mr Sokol said he had also priced Labour's windfall tax into the bid.
Last night bitter accusations were being traded between the two sides about whether CE Electric had privately proposed a bid worth around pounds 7 a share. Mr Morris said the 630p formal offer had been lower than any figure previously discussed.
He also accused CE of "unreasonable hustling" in trying to get agreement on the bid before a Northern board meeting could be held yesterday. "I regard all that as rather silly," he said.
CE Electric responded with a statement insisting it had never suggested a price anywhere near pounds 7 a share. It said: "This range was entirely the proposal of Northern Electric, who claimed that financial information would be made available to CE Electric to substantiate such an ambition."
Most City electricity analysts agreed with CE that the bid was reasonably priced, given that Northern had paid out pounds 500m to its shareholders in preference shares and special dividends after the Trafalgar bid. "For the first time ever I think they are paying too much," said one leading analyst.
Another suggested that by adding back the various payouts to investors, the CE Electric bid would be worth pounds 10.25 a share, compared with Trafalgar's highest cash offer of pounds 11. However Trafalgar subsequently lowered its bid to pounds 9.50 following the electricity regulator's shock decision to look again at price controls.
Mr Morris argued the company's shares had been undervalued by the City because of the cash given away to shareholders. The resulting debt burden is likely raise Northern's gearing to around 125 per cent next year after a further special payout of 56p a share in February. Northern also pledged to bring forward the release of its half yearly results, due on 5 December.
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