Northern ready to accept Offer rules

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Industrial Correspondent

Northern Electric is expected to agree to new price controls set by the regulator, Offer, by the end of this week, opening the door for a fresh bid by Trafalgar House. It is thought that Northern will say regulatory uncertainty is deemed to have been removed and that a new offer can therefore proceed.

The board of Northern angered some shareholders earlier this year by refusing to consent to a pounds 9.50 bid by Trafalgar after its pounds 11 offer lapsed in March. It argued that while Professor Stephen Littlechild, director general of Offer, was deciding on price controls, it could not sensibly allow a fresh attack. Although the way will be cleared for the predator, the management of the electricity firm has made it clear that this does not mean it will lend its support.

There is a view that Trafalgar may make an offer at about pounds 9 per share on the grounds that bid speculation has already buoyed Northern's share price. Northern's shares rose by 3p yesterday to 864p.

Any renewed offer is likely to spark comparisons between Trafalgar House and Southern Electric International, the global arm of a large US utility group battling for control of South Western Electricity. Trafalgar House is a conglomerate which has put much emphasis on the regional fit between its business and that of Northern Electric, while SEI has cited its experience as a utility and the similarities between Sweb and its existing businesses in North America.

Sweb yesterday reiterated its view that the pounds 9-per-share offer from SEI undervalues the company. It is working on a defence package likely to take the form of financial restructuring and the possible payment of a special dividend.

City analysts say that if Sweb increased its gearing to 120 per cent - which could happen in any case in the event of a takeover by SEI - it would release about pounds 170m in cash and allow a 150p special dividend. The US group has said that it would finance the pounds 1bn takeover with a mixture of debt and equity, which would result in a high level of gearing in a company formed as a takeover vehicle. This vehicle, Southern UK, would then be collapsed into the electricity company, as long as Professor Littlechild agreed.

Sweb has now called in Goldman Sachs to help in its fight for independence. Goldman is working on a valuation of the company from a US perspective while Schroders continues as Sweb's main financial adviser.

The company will use next week's annual general meeting in Torquay to court its small shareholders. It believes there are strong local concerns about control of a public service company passing to an unknown US group. SEI has said that day-to-day management would remain in Bristol. But it also warned that Sweb's cost-cutting plans would be accelerated, fuelling fears of job cuts.