Power firms plan MMC fight against price curb

Appeal against Offer could help to fend off unwanted bids

BY MARY FAGAN

Industrial Correspondent

At least one of the 12 regional electricity companies - known as recs - is likely to reject the latest price controls, announced last week by the industry regulator Offer, which are intended to cut pounds 1.25bn from electricity bills over four years.

It is likely the companies will take the option of taking their case to the Monopolies and Mergers Commission instead.

Among those firms industry sources say are actively considering taking the MMC route are East Midlands Electricity, Yorkshire Electricity and South Wales Electricity.

According to these sources, the latest price proposals from Professor Stephen Littlechild, director general of Offer, will be hard for some companies to accept because he has changed his view of the asset base on which the allowed returns to the companies are calculated.

One senior executive who feels the Offer proposals are wrong said: "It really is almost a fraud to investors."

There is also a view that some companies will go to the MMC to fend off the expected flurry of takeover bids following the expiry earlier this year of the Government's golden share in the companies.

Yorkshire, thought to be a target for takeover by Scottish Power or Hanson, may see a lengthy MMC investigation as a useful defence tactic.

The company has been the focus of attention for months because of the stake held by Swiss Bank in a market-making capacity. The stake was once about 8 per cent but recently dropped to 5 per cent.

Trafalgar House is set to appoint Robert Fleming as its advisor on a renewed bid for Northern Electric following the lapse of its pounds 11 per share offer in March.

Northern is likely to be amongst the first of the 12 recs to accept the new price controls, clearing the way for a fresh attack from Trafalgar House.

Trafalgar's previous advisor, Swiss Bank Corporation, has had to stand down following its acquisition of S.G.Warburg, formerly advisor to Northern.

Trafalgar, which was prevented by Northern from launching a second bid at pounds 9.50, is thought to be preparing to come back at about pounds 9, valuing Northern at around pounds 1bn. Northern's shares, which rose to 858p on Friday, are regarded as already showing something of a bid premium.

Some industry analysts said yesterday that the Trafalgar situation may be a one-off, and industry consolidation less than expected by the market.

This is because Trafalgar has huge tax losses which it has been unable to set against profits recently, because it has been in the red.

Buying Northern would enable Trafalgar to set these losses off against Northern's steady cash stream. Not many companies are in the same boat as Trafalgar, according to these analysts.

The largest rec, Southern Electric, would like a merger, and is thought to have attempted to link with Midlands Electricity lasy year, creating a group worth pounds 3.5bn, but was rebuffed. Its favourite potential merger partners now appear to be South Western, Seeboard and London.