South Western must face the aggressor alone

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The Independent Online
South Western Electricity was always considered one of the most vulnerable of the regional electricity companies to a bid, so yesterday's developments could not have come as a great surprise to Sweb's board of directors. Nor could the predator, Southern Electric International. The US's largest electricity utility has made little secret of its European ambitions, having already set up a joint venture with its British namesake, Southern Electric plc. Nonetheless, it is plain from its approach - an unfriendly "dawn raid" to establish a commanding bridge head - that the Americans are determined not to overpay. If today's talks between the two sides prove unconstructive, Southern will go the hostile route at a price that will almost certainly disappoint the optimists.

What chance has Sweb of resisting Southern's clutches and does it really want to? That first line of defence, a reference to the Monopolies and Mergers Commission, is virtually ruled out in this case.

Northern failed to win a reference when attacked by Trafalgar House; there seems little reason to bar the Americans on national interest grounds from a small corner of the UK electricity market.

Nor does a white knight from outside the industry look very likely. Why get into a bidding war with Southern when there are so many other unattached RECs to choose from? South Western could merge with another REC - the UK Southern is keen to form defensive alliances of this sort - but it would be hard to make the numbers stack up if any kind of a bid premium had to be paid.

So if South Western wants to fight, it may have to do so alone. Here, too, the prognosis is hardly great. Northern's "scorched earth" approach is all but ruled out since South Western has very recently gone on record to say a debt gearing level of more than 60 per cent would be inappropriate. Furthermore, the latest price review makes the prospects of more profits growth even more limited than that referred to in the last accounts. Duty calls, however. Even though Southern would probably prove a very acceptable foster parent, if the Americans are as mean as yesterday's dawn raid suggests they might be, South Western is going to have to resist.

Electricity seems as incestuous in its investment banking as in everthing else. Swiss Bank, or rather SBC Warburg as it must now be called, leads the attack, as it did with the assault on Northern. Meanwhile Northern's adviser, Schroders, also leads the defence with South Western. Even the public relations line-up mirrors the Northern episode exactly. No contracts for differences here it seems.