While some investors rushed to the market, anticipating a renewed round of takeover bidding for the 12 regional elec- tricity companies (RECs), the bears argued that at best there might be two offers from companies outside the sector and possibly one merger within it over the next two years.
That would be much less activity than is being predicted by the bulls, who see the sector shrinking to as few as five companies.
Meanwhile, pressure is mount- ing for Professor Littlechild to do the honourable thing and step down after the Stock Exchange said that it had warned him not to give the RECs advance copies of his review 24 hours before he made it public.
The investigation launched by the Exchange on Friday is the second he has caused. The first followed his announcement that he was re-opening the price issue in the middle of the Government's flotation of the power generators.
The possibility of a shake-up in the industry arose after the Government's golden shares in the RECs expired last spring, but it was put on hold by the regulator's decision to re-consider the price structure. His conclusion, leaked to the markets on Thursday, was to claw back pounds 1.25bn on top of the pounds 2.5bn in cuts he announced last August.
Although the stiffer regulatory regime is not seen as a great impediment to deal making, the sector's bears argue that bid speculation is overblown.
If the pessimists are right, the market will soften over the next few months. "I doubt there will be very much corporate activity at all," said one observer at a big City brokerage house. "There will be have to be a big correction at some point. Prices will start to drift off over the next week."
Shareholders are more likely to get their money back from the demerger of the National Grid, or from companies gearing up their balance sheets following a Labour victory in the next general election but before any windfall tax on privatised utilities could be introduced, said one industry insider.
Trafalgar House, the hotels to construction group, is expected to renew the bid for Northern Electric that sparked the electricity regulator's review in March, as soon as it gets a green light from Northern's board, probably next week.
Hanson, the Anglo-American conglomerate, is also thought to be still interested in picking up a REC, possibly Yorkshire. But if it is considering a bid, it will probably wait until after Trafalgar has established a price before jumping in.
The big advantage to an external bidder is the ability to offset tax credits against a utility's steady cash flow, a position few large companies are in. "You didn't see a white knight emerge to counter Trafalgar's bid," said one City source.
Two of the smaller RECs might merge, but they would have little time to enjoy any savings before the next price review in four years' time.Reuse content