OK, this requires some explaining, since it is not widely appreciated in the stock market. Investors are generally of the view that even if the higher offer from Texas is referred to the Monopolies and Mergers Commission, or collapses for some other reason, there is still PacifiCorp's offer to fall back on, which has already received regulatory approval.
But actually it may not work this way. The problem is that both sides have a potentially blocking stake in the battle. Texas owns nearly 15 per cent of Energy Group shares and PacifiCorp owns 8.8 per cent. Since the terms of PacifiCorp's bid require it to gain acceptances of 90 per cent, so that it can compulsory purchase the balance, Texas is in a position to block PacifiCorp.
Though we haven't yet seen the Texas offer document, it seems highly likely that the company's bankers have insisted on similar financing terms. Ah, you say, but PacifiCorp hasn't got 10 per cent. Oh yes it has. Lehman Brothers also own shares in Energy Group, and as an associate of Texas, these shares have to be cancelled out of the calculation, thereby tipping PacifiCorp over the 10 per cent threshold.
The upshot is that just as Texas can block PacifiCorp, PacifiCorp can block Texas.
When push comes to shove, it seems rather unlikely that bankers will allow this matter to stand between them and their fee. All the same, potentially there is a big problem here, and both sides are beginning to get exercised by it. There is a way out, however. PacifiCorp is one of the few companies in the world that actually wants Peabody, Eastern's US coal mining operation.
Texas, by contrast, does not want it and so has lined up Lehman and its clients to take the company off its hands should its bid for Eastern prove successful. The obvious solution, then, is for Texas to sell Peabody to PacifiCorp instead. Officially, PacifiCorp is still in the race to buy the whole of Energy Group.
In the end it may have to settle for the consolation prize of Peabody.