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.

PROMOTED VIDEO
Life and Style
techCould new invention save millions in healthcare bills?
Sport
David Moyes gets soaked
sport Moyes becomes latest manager to take part in the ALS challenge
Voices
A meteor streaks across the sky during the Perseid Meteor Shower at a wind farm near Bogdanci, south of Skopje, Macedonia, in the early hours of 13 August
voicesHagel and Dempsey were pure Hollywood. They only needed Tom Cruise, says Robert Fisk
News
peopleEnglishman managed quintessential Hollywood restaurant Chasen's
Life and Style
food + drinkHarrods launches gourmet food qualification for staff
Arts and Entertainment
Michael Flatley prepares to bid farewell to the West End stage
danceMichael Flatley hits West End for last time alongside Team GB World champion Alice Upcott
News
ebooksAn evocation of the conflict through the eyes of those who lived through it
Life and Style
Horst P Horst mid-fashion shoot in New York, 1949
fashionFar-reaching retrospective to celebrate Horst P Horst's six decades of creativity
News
Members and supporters of the lesbian, gay, bisexual, transgender (LGBT) community walk with a rainbow flag during a rally in July
i100
Life and Style
Black Ivory Coffee is made using beans plucked from elephants' waste after ingested by the animals
food + drinkFirm says it has created the "rarest" coffee in the world
Arts and Entertainment
Jamie T plays live in 2007 before going on hiatus from 2010
arts + entsSinger-songwriter will perform on the Festival Republic Stage
Life and Style
food + drinkThese simple recipes will have you refreshed within minutes
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Service Desk Analyst- Desktop Support, Helpdesk, ITIL

£20000 - £27000 per annum: Harrington Starr: Service Desk Analyst- (Desktop Su...

Service Desk Analyst - (Active Directory, Support, London)

£25000 - £35000 per annum: Harrington Starr: Service Desk Analyst - (Active Di...

Junior Quant Analyst - C++, Boost, Data Mining

£30000 - £50000 per annum: Harrington Starr: Junior Quant Analyst - C++, Boost...

Junior Quant Analyst (Machine Learning, SQL, VBA)

£30000 - £50000 per annum: Harrington Starr: Junior Quant Analyst (Machine Lea...

Day In a Page

All this talk of an ‘apocalyptic’ threat is simply childish

Robert Fisk: All this talk of an ‘apocalyptic’ threat is simply childish

Chuck Hagel and Martin Dempsey were pure Hollywood. They only needed Tom Cruise
Mafia Dons: is the Camorra in control of the Granite City?

Mafia Dons: is the Camorra in control of the Granite City?

So claims an EU report which points to the Italian Mob’s alleged grip on everything from public works to property
Emmys look set to overhaul the Oscars as Hollywood’s prize draw

Emmys look set to overhaul the Oscars as Hollywood’s prize draw

Once the poor relation, the awards show now has the top stars and boasts the best drama
What happens to African migrants once they land in Italy during the summer?

What happens to migrants once they land in Italy?

Memphis Barker follows their trail through southern Europe
French connection: After 1,300 years, there’s a bridge to Mont Saint-Michel

French connection: After 1,300 years, there’s a bridge to Mont Saint-Michel

The ugly causeway is being dismantled, an elegant connection erected in its place. So everyone’s happy, right?
Frank Mugisha: Uganda's most outspoken gay rights activist on changing people's attitudes, coming out, and the threat of being attacked

Frank Mugisha: 'Coming out was a gradual process '

Uganda's most outspoken gay rights activist on changing people's attitudes, coming out, and the threat of being attacked
Radio 1 to hire 'YouTube-famous' vloggers to broadcast online

Radio 1’s new top ten

The ‘vloggers’ signed up to find twentysomething audience
David Abraham: Big ideas for the small screen

David Abraham: Big ideas for the small screen

A blistering attack on US influence on British television has lifted the savvy head of Channel 4 out of the shadows
Florence Knight's perfect picnic: Make the most of summer's last Bank Holiday weekend

Florence Knight's perfect picnic

Polpetto's head chef shares her favourite recipes from Iced Earl Grey tea to baked peaches, mascarpone & brown sugar meringues...
Horst P Horst: The fashion photography genius who inspired Madonna comes to the V&A

Horst P Horst comes to the V&A

The London's museum has delved into its archives to stage a far-reaching retrospective celebrating the photographer's six decades of creativity
Mark Hix recipes: Try our chef's summery soups for a real seasonal refresher

Mark Hix's summery soups

Soup isn’t just about comforting broths and steaming hot bowls...
Tim Sherwood column: 'It started as a three-horse race but turned into the Grand National'

Tim Sherwood column

I would have taken the Crystal Palace job if I’d been offered it soon after my interview... but the whole process dragged on so I had to pull out
Eden Hazard: Young, gifted... not yet perfect

Eden Hazard: Young, gifted... not yet perfect

Eden Hazard admits he is still below the level of Ronaldo and Messi but, after a breakthrough season, is ready to thrill Chelsea’s fans
Tim Howard: I’m an old dog. I don’t get too excited

Tim Howard: I’m an old dog. I don’t get too excited

The Everton and US goalkeeper was such a star at the World Cup that the President phoned to congratulate him... not that he knows what the fuss is all about
Match of the Day at 50: Show reminds us that even the most revered BBC institution may have a finite lifespan – thanks to the opposition

Tom Peck on Match of the Day at 50

The show reminds us that even the most revered BBC institution may have a finite lifespan – thanks to the opposition