Outlook: PacifiCorp offer should do the trick

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The Independent Online
The boys from Portland, Oregon are back and this time they are more serious. But are they serious enough? PacifiCorp's 765p offer for Energy Group has been taken as a sighting shot rather than a knockout blow, which is why the market price remains comfortably above the revised offer terms and why Energy Group is keeping the door open to rival offers.

As a means of flushing out Texas Utilities and Nomura, however, PacifiCorp's increased bid ought to do the trick. In the event of a three-way auction, Energy Group could go for something north of 800p, valuing the business at nearly pounds 4.3bn - a 43 per cent premium to its market value before PacifiCorp popped its head out of the Oregon woods eight months ago. Who said the Americans' appetite for British regional electricity companies was on the wane?

Actually it is rather hard to see how Energy Group's prospects have improved materially since PacifiCorp's first tilt at 695p was put on ice by Margaret Beckett and the Monopolies and Mergers Commission. If anything, Peabody looks even more of a bombed-out US coal business while the regulatory climate for UK Recs is scarcely any less hostile. There is one thing that's changed, however, and that's the direction of long-term interest rates. When, like PacifiCorp, three quarters of the funding is in the form of debt, these things are important.

At this stage in the game, PacifiCorp also has the priceless advantage of MMC clearance. Just because it is another US utility, Texas cannot assume a bid would escape scrutiny, given its attitude to labour relations, its management record running a nuclear business and the effect of a highly- geared bid on its balance sheet.

Guy Hands at Normura will also have to earn every penny of his reputed pounds 40m salary if he is to construct a deal which stacks up financially for the Japanese. Unlike his previous sorties into pubs and train leasing, regulators would not allow him get away with mortgaging off Eastern's revenue stream.

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