Power: here we go again

New round of rationalisation in prospect as US owners plan merger and flotation of London Electricity and Seeboard
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The Independent Online
Central and South West Corporation, of Dallas, and Louisiana- based Entergy are considering merging their UK electricity interests and refloating the combined company on the London market.

If the plans go ahead customers of London Electricity and Seeboard, serving the South- East of England, will have an opportunity to reinvest in their local electricity company. London Electricity was taken over by Entergy late last year and Seeboard by CSW 12 months earlier.

The plans by the two US-owned Recs follow the announcement last week that PacifiCorp, a California utility, had made an agreed pounds 3.65bn bid for Eastern Group, owners of Eastern Electric

Some analysts believe the proposed deal stems from the needs of both companies to raise capital and boost the value of their shares.

Central's share price has fallen from a high of $28.85 (pounds 18.08) this time last year to a low of $17.25 in April. The shares have since recovered to $21, still 25 per cent below their high. Entergy has suffered less, but its shares have underperformed the advancing market since the start of the year, falling from over $28 in January to $26.75 on Friday.

It would be possible for other US utilities controlling UK regional electricity companies to do similar deals. Companies in adjacent regions such as Midlands Electricity and East Midlands Electricity (owned respectively by Cinergy/GPU and Dominion Resources) could make significant savings by merging.

Analysts in the US welcomed the possible moves by the multinational US electricity sector, saying they would have a positive impact on share prices, which have been affected by weather and uncertainties about deregulation in the US.

"The winter has been very mild this year in the US, hurting all utilities' first-quarter results," said Dan Rudakas, a utilities analyst at Everen Securities, a Chicago brokerage. "Plus, bonds have performed poorly since the start of the year and since most investors still treat utility shares as bonds - buying them for dividend income - the electricity companies have tracked the bond market downwards."

Mr Rudakas said US managements had two decades of experience of cutting costs and merging different regional electricity companies in the US. "Because the regulators have forced them to raise prices below inflation, they have had to get smart about protecting their bottom lines, and that has inevitably meant consolidation and cost-cutting," he said.

Another analyst pointed to the uncertainty surrounding the coming deregulation of the US electricity industry as a possible source of US utilities' share price malaise, even though the laws to deregulate regional markets are still mostly stuck in the US state legislatures. The uncertainty is believed to centre on the question of how much US taxpayers will be asked to contribute towards the decommissioning costs of nuclear power plants when they come to the end of their useful lives.

"Some of these [US] electricity companies borrowed a lot of money to buy their UK subsidiaries, and while they have all shown good returns on their investment, confidence in their domestic businesses has suffered," he said.

PacifiCorp's bid for the Energy Group could generate $250m in fees for bankers Goldman Sachs, Citicorp and JP Morgan. Goldman could get $90m.

The arrangement is the latest example of "one-stop shopping" - where one firm advises a client in a takeover, helps sell the company's subsidiaries, underwrites its bonds and makes loans. Goldman was PacifiCorp's "one- stop shop", but brought in Citicorp and JP Morgan to help.

PacifiCorp is selling Pacific Telecom to Louisiana's Century Telephone for $2.2bn to help fund the bid. Century said the acquisition will make it the 12th-largest US local phone company.

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