Trafalgar House would abandon its £1.2bn hostile bid for Northern Electric if the regulator, Offer, pursues proposals that 25 per cent of the electricity firm should be refloated on the Stock Exchange. Trafalgar, which has been in talks with Offer since early last week, believes that it would cost between £100m and £150m to float the shares.
The flotation is one of a range of proposals being considered by Professor Stephen Littlechild, director-general of Offer. Professor Littlechild is concerned that a takeover would damage his ability to get information about Northern and to regulate the industry. He is discussing changes in Northern's operating licence with Trafalgar House to address his worries. If Trafalgar disagrees he can refer the matter to the Monopolies and Mergers Commission.
Trafalgar House and its advisers are anxious about Professor Littlechild's approach, which they regard as highly interventionist. The talks with Offer are thought to be very difficult. Even if Professor Littlechild does not insist on flotation, he is understood to be focusing on dividing Northern into separate businesses covering different activities.
One source close to the negotiations said that if the licence conditions prove "unduly onerous" Trafalgar would pull out. The offer document published in January contains a clause stating that the offer is conditional on "the director-general of electricity supply indicating in terms satisfactory to Trafalgar House that it is not his intention to seek any modification to one or more of the licences held by Northern Electric under the Electricity Act 1989 and Northern not agreeing to any such modification, except on terms satisfactory to Trafalgar House".
Should Professor Littlechild refer the bid to the MMC, Trafalgar House could seek a judicial review, but this would take many months. It is also thought that Michael Heseltine, President of the oard of Trade, could overrule Professor Littlechild. To do so, however, would undermine the Government's line that the utility regulators are independent.
Trafalgar is also angry at Professor Littlechild's decision to go on holiday this week. Trafalgar is due to put its final offer out by Friday and wanted the regulatory matter clarified by then.
At present the cash alternative on offer is £10.48 compared with Northern Electric's closing price on Friday of £11.12 and an average for the regional electricity companies of £8.18. There is a view that shareholders will take whatever cash is on offer from Trafalgar and invest it in another regional electricity firm.
Northern is expected to continue its war of words today with a challenge to Trafalgar to "put up or shut up". The company claims that the offer is "derisory", particularly in the light of its final defence last Friday which offered shareholders a package worth £5.07 per share in addition to an increase in the dividend of at least 33 per cent in the year to 31 March.