The £5.07 includes a special dividend of £1.50 to be paid before the end of April, and an irredeemable preference share worth at least £1 on issue with an underwritten cash alternative of £1. The balance is the value of Northern's shares in the National Grid Company, which it has promised to distribute to shareholders, and a special dividend which is expected to be paid prior to the planned flotation of the grid.
The value of the package is about £500 for the average small shareholder, of which Northern has 110,000. The company is also projecting expected increases of 13 per cent in the ordinary dividend in the years ending March 1996 and 1997.
David Morris, chairman, said the measures show that Trafalgar's bid "seriously undervalues" Northern Electric's shares. He said that the Trafalgar cash alternative of £10.48 places a value on Northern's shares of only £5.41 once the package being offered to shareholders is implemented. Northern's shares closed up 21p at £11.12.
Mr Morris told shareholders: "You would be giving up significant value by accepting the Trafalgar House offer. A continuing investment in Northern Electric would be worth significantly more to you."
The measures proposed by Northern Electric would leave the company with debt gearing of 225 per cent by March 1996, which is unprecedented among UK utilities and compares with Northern's cash-positive position last September. The company said that its plans would be funded through bank borrowings and that gearing would fall to 100 per cent by March 2000.
Mr Morris said he is "comfortable" with the level of gearing. "This is a secure business with a predictable revenue stream. The gearing certainly is not crazy because it's bankable and entirely manageable."
He added that Northern would bring down its borrowings through a variety of measures, including tight cost control. The company has already said it will cut 520 jobs this year and 200 in each of the two following years. It also intends to rein back on capital expenditure on non-core businesses.
City analysts said the defence shows the strengths of the regional electricity firms and added that the other 11 companies in the sector would be under pressure to produce similar measures to increase shareholder value. Nigel Hawkins, an analyst with Hoare Govett, said: "The question is, do the other companies do something now or do they wait until a predator comes along?"
Trafalgar House, which has until next Friday to increase its offer, said that Northern's proposals would leave "a rump burdened with an alarming level of new debt and expensive preference shares."
Nigel Rich, chief executive, said: "That is not a defence, that is an argument for Northern Electric shareholders to accept the Trafalgar House offer or sell their shares while they still have the chance at these prices."
Although the bid has been given the go-ahead by Michael Heseltine, president of the board of trade, it could yet be referred to the Monopolies and Mergers Commission by Professor Stephen Littlechild, director general of electricity supply, who is concerned about his ability to regulate in the event of a takeover.Reuse content