Outlook: British Energy

BRITISH ENERGY was the company that dared not speak its name. When the business was privatised in 1996 it was nothing more than a collection of nuclear reactors. They nevertheless decided to leave the dreaded N- word off the cover of the prospectus in case it frightened the investment community. Two years on, however, BE looks like it is about to live up to its name.

More nuclear stations remain the long-term banker. But the new management team under Peter Hollins has decided that it is time to diversify into the wider energy market. So he has tabled a pounds 2bn bid for London Electricity and is also toying with the idea of forking out another pounds 1bn for a pair of coal-fired stations from either PowerGen or National Power.

With zero debt and a market capitalisation of pounds 4bn - more than double its value at flotation - BE could comfortably fund both acquisitions. There is the small matter of financing its ongoing nuclear liabilities, but what better stream of income to tap than London's monopoly distribution business?

So an offer for London looks logical, even if the other shortlisted bidder, France's state-owned EDF, is using taxpayers' money to drive the auction up to fancy prices. However, by attempting to acquire some coal-fired stations as well, BE may find its enthusiasm to diversify backfiring painfully. The Government might be prepared to allow BE to swallow London, overlooking the fact that it also controls 21 per cent of the generating market.

But by buying a couple of coal-fired stations too, BE would make itself a price-setter, in which case it could find itself in the position of PowerGen and have to sell assets in order to integrate vertically.

Mr Hollins would be better to settle for one or the other, or he might find himself missing out on both. Since he won't see another nuclear station built during his working life, even if the politicians do eventually bow to the environmental argument, that would be an ominous start to his career in BE.