Northern's chances still look remote

What price an emaciated Northern Electric? That is the question shareholders are going to have to decide now that the main planks of the company's defence against Trafalgar House's £1.2bn bid are out in the open. In a defence document which somewhat unfortunately has as its front cover a picture of the Tyne Bridge which was built by Trafalgar House, Northern Electric has promised a package of payouts to shareholders worth some £5.07 a share.

The bulk of this would be accounted for by flotation of the National Grid and new underwritten preference shares. Even so the £1.50 special one off dividend being promised and other factors involved in offering such a tempting package of goodies, is enough to send debt gearing soaring from virtually nothing now to 225 per cent

In most companies this would be regarded as dangerously, possibly terminally, high. Regional electricity companies are quite unlike anything else, however. As monopolies which are governed by a regulator who has proved naively kind, they are a licence to print money. Northern's claim that it can sustain a dividend 33 per cent higher than at present and within five years still have gearing down to a more manageable 100 per cent, could well be true. If it is, then the company is plainly worth substantially more than the £10.48 a share Trafalgar is bidding.

This is why. Assuming the new, highly leveraged Northern trades on a market yield of 4.5 per cent, then it ought to be able to command a stock market price of a little over £9 a share. Add back the £5.07 handout and the full valuation comes out at more than £14 a share. Ingenious, isn't it? The problem is that the stock market doesn't buy it. Last night the shares were trading at only £11.12, suggesting a valuation for the Northern stub of little more than £6 a share.

In truth this is actually the more realistic valuation. For a low risk business in the current economic climate, 225 per cent gearing looks reasonable but how would Northern fare should interest rates rise markedly or should a future Labour government impose a windfall tax on the utilities? Furthermore, there is nothing new in the defence document for customers. Is it credible that even a regulator as accomodating as Professor Stephen Littlechild would not insist that largesse on this scale is matched by a similar handout to customers?

Northern may be able to extract a few coppers more out of Trafalgar with a defence that deserves full marks for ingenuity but its chances of seeing off the invaders completely look remote. As far as the City is concerned, all 12 RECs are much of a muchness. Most fund managers would be happy to take the Trafalgar House cash and plough it back into the others, which they can buy into at a substantial discount to Northern's bid inflated price. The chances are that - bid or no bid - the others will follow Northern's lead in paying out substantial special dividends. What's the point in leaving the cupboard full of goodies for a future Labour Government to gobble up? That's a logic most RECs are going to find hard to resist. The alternative of using the cash fountain for diversification has already been tried with results that were at best poor and at worst disastrous. What a business.

A business transformed at a heavy price

British Gas's response to the latest Gas Consumer Council statistics showing a sharp rise in customer complaints is much the same as the one it has been giving for the past year.

When challenged to explain the endless stream of bad publicity which seems to have engulfed it. the message goes something like this: "Sorry, we're not in right now but if you would like to call back in a few years time things will be much better".

Gas customers have had a lot to put up with lately. The excuse is that British Gas is carrying out an extensive reorganisation which has forced it to take its eye off the ball. It may not sound like a very good excuse but it is actually what happens during a major restructuring. They can rarely be accomplished without some short-term pain.

No surprise then that one of the few people prepared to defend British Gas is Michael Heseltine, President of the Board of Trade. For who else is responsible for the haste with which the company has had to restructure? Lest we forget, the Monopolies Commission in August 1993 recommended full competition for private sector customers should be phased in from 2000 to 2002. Michael Heseltine decided it should be achieved between 1996 and 1998.

Even the industry regulator and Gas Consumers Council have been taken aback by the scale and speed of the reorganisation that decision has precipitated. The council says the loss of 25,000 jobs and a £600m reduction in operating costs has left ''morale in tatters and service standards well below 1993's excellent level.''

British Gas's structural transformation is just as remarkable as the company claims. The UK gas business has been broken into its five constituent parts, each with its own managing director. Layers of management have been removed at the top and in the regions. The headquarters at last resembles a modern company rather than the tip of a vast nationalised industry bureaucracy. In private ministers are genuinely enthusiastic about the ability of the chairman, Sir Richard Giordano, to identify strategic problems and deal with them.

There is always a measurable price for any corporate reorganisation, through the disarray it causes, no matter how temporary. Managers in the gas businesses have new freedoms to decide and it takes time for them to get it right. Meanwhile, the board becomes inwardly focussed and misses the obvious - including the fact that there is likely to be public outrage at a large pay rise.

The correct comparison, year on year, is in fact the 28 per cent which British Gas claims rather than the 75 per cent headline number for basic pay. But even if the spin doctors had got across the message earlier, 28 per cent would have been condemned in the Commons as an awfully large rise.

These are not excuses, but observations about the way in which corporations work. More haste less speed, as the government will duly discover after rail privatisation. Transformation of the gas business is not yet over, so further embarrassments must remain a distinct possibility.