PowerGen in merger talks with US giant

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POWERGEN, Britain's second largest electricity company, is exploring the possibility of a merger with Houston Industries, one of the largest power suppliers in the US, to form an Anglo-American combine with a market value of more than pounds 10bn.

The talks are at a very preliminary stage, and even if a deal is struck it could take several months to come to fruition. However, both sides are keen to push ahead, the two managements have already established a close rapport and there has been a general meeting of minds over the way ahead.

One source put the odds of a deal at better than 50 per cent, although he acknowledged that there were considerable regulatory and valuation barriers to surmount before terms could be agreed.

PowerGen has been frustrated in its attempts to expand in the UK by buying a regional electricity company (Rec). Ed Wallis, the chairman, has been saying for months that the group might as a result be forced to switch its attention to the US. Since then, PowerGen has explored the possibility of a deal with a number of US players including Central and South West and Cinergy, both of which have bought UK Recs.

National Power, Britain's largest power generator, is also being wooed by the Americans but has so far adopted a more sceptical and independent stance. A big stumbling block to any deal with a US player is that US electricity companies tend to be more highly valued than their UK counterparts. This makes a straight takeover by PowerGen or National Power of a US company virtually out of the question and even a merger difficult to achieve in a way which is advantageous to UK shareholders.

Both PowerGen and National Power, face intense competitive pressure in their core domestic market, with some analysts predicting that profits and dividends will shortly be under threat in the absence of aggressive international expansion.

The same logic applies to the main US players, who are facing increasingly fierce competition in their own back yard as deregulation of the energy market begins to bite. With everyone thinking along the same lines, there has been what one source describes as "an orgy of transatlantic talks".