Power companies seek US acquisitions
Sunday 23 August 1998
Veterans of deregulation at home, the UK utilities think they can put their knowledge to profitable use in a US market that is just opening up to competition. In the most publicised transaction, British Energy and Peco Energy of Philadelphia said in July they would buy the one working reactor at the Three Mile Island plant, scene in 1979 of the worst nuclear accident in US history.
At $100m (pounds 61m) analysts say Three Mile Island is a great buy for the two partners. Still, that a foreign company would want such a notorious asset is an indication of how attractive the US electricity market, the biggest in the world, has become to UK utilities whose growth prospects are limited at home.
"It's an enormous opportunity. . . This is a market that has been fossilised for 50 years and is at the early stages of being opened up to proper competition," said Peter Atherton, an analyst at Dresdner Kleinwort Benson.
The UK push into America faces enormous risks and formidable obstacles. To succeed, British companies must be prepared to outbid well-heeled US rivals and deal with regulators who so far have prevented foreign control of American utilities.
While they have had some success buying assets such as power plants, UK companies have been frustrated in their efforts to merge with or acquire US utilities.
After more than three months of negotiations, merger talks collapsed last week between PowerGen, which generates 19.5 per cent of the power used in England and Wales, and Houston Industries, one of the biggest utilities in Texas. Together, the two companies would have had a market value of more than $16bn.
Earlier this year, Scottish Power abandoned efforts to buy Florida Progress, an electric utility, in what would have been a more than $4bn acquisition. Yet both Scottish Power and PowerGen say they won't give up on finding US acquisitions or merger partners.
"We continue to talk to a number of people," said Peter Hickson, PowerGen finance director. "We're very enthusiastic about the US."
UK companies, which want to become global competitors, cannot ignore emerging opportunities to grab a piece of $230bn in annual US power sales. Driven by the prospect of lower electricity prices, 16 states
are preparing to eliminate utility monopolies over the next few years and let new players vie for customers. The entire market is expected to open in the next decade.
Five of the biggest power companies in the UK have said they are planning to buy or merge with US utilities, or acquire multimillion-dollar assets such as power plants and transmission lines.
Entering a foreign market is full of pitfalls, as US companies know from their own experiences in Britain. American power companies have acquired eight UK utilities over the last three years, but they have not earned nearly as much as they expected on the other side of the Atlantic.
UK companies can expect similar problems with regulation in the US, where state officials often view utilities as public trusts run on behalf of local customers rather than profit-making enterprises entitled to global aspirations.
"There are 56,000 people involved in electricity regulation in the US. The regulatory burden should be in no way underestimated," said Mike Bottomley, group manager of KPMG's global utilities team.
US regulators can delay acquisitions for two years or more, increasing the risk that a bid will fail or giving competitors time to come up with rival offers. State regulators often demand big rate cuts for consumers before approving acquisitions, biting into returns.
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