Outlook: NatGrid/Energis

NATIONAL GRID was once an unrecognised and unloved organisation, a hidden treasure buried within the 12 regional electricity companies that owned it. Eventually the City and the Government realised it might be worth something and forced a demerger. The years passed and then all of a sudden it emerged that there was another treasure lying Russian doll- like inside the Grid - a telephone company that ran its cables along the Grid's electricity pylons. They called it Energis and floated a quarter of its equity on the stock market.

This was always going to be a controversial means of value recognition. Why not follow your own path to stock market independence, free market purists asked, and simply demerge Energis? All kinds of ingenious excuses were tabled, but essentially it came down to this quite basic line of reasoning -- because National Grid, having given birth to Energis, wanted to keep some of the potential upside in the stock for itself.

In a way, it has been proved correct. The telecoms sector has soared and with it, Energis. The Grid's remaining 75 per cent stake has come to account for more than 40 per cent of its total stock market value, and everyone, the Grid's management included, has been able to bask in its warm glow. Time, then, to sell some more. Fortunately for the Grid, there can be no question of a demerger this time round. Having already sold some of the company, the tax implications would be horrendous.

But essentially it is still the same old thing. David Jones, the Grid's laconic chief executive, just cannot let go. The Grid's bankers are even creating a convertible bond, backed by the Grid's own cash flow, to allow the Grid to participate in the potential upside of the shares they are selling. Since disposing of another 25 per cent will allow Energis to qualify for the FTSE 100 Index, this could be quite considerable.

Given how much money he's made for his investors, nobody's going to quarrel too much with Mr Jones about all this. Who knows? There may be another Russian doll or two yet to be moulded out of the pounds 1.2bn the Grid will receive from this latest sale.

All the same, there is a certain lack of logic about the Grid's position. As quickly as it sells out of Energis, it is investing in exactly the same sort of telecom ventures elsewhere, most recently in Brazil. There is an obvious conflict of interest here that won't finally be resolved until the G

rid is out of Energis altogether.