Trafalgar ends Northern siege

Chief executive denies that financial weakness prompted the climb- down

MARY FAGAN AND

TOM STEVENSON

Fresh doubt was cast on Trafalgar House's financial position yesterday as it ended its siege of Northern Electric with the announcement it would not make a fresh bid following the lapse of an pounds 11-a-share offer in March. Sources close to the com pany said it had been unable to underwrite an offer for Northern, which could have cost up to pounds 1bn.

Trafalgar, which has spent pounds 12m pursuing its target, denied financial weakness had been a factor in its climb-down. It blamed the recent clamp- down on electricity prices by the Offer watchdog, Professor Stephen Littlechild, which it said had diminished the attraction of Northern.

"It is not a case of problems with funding, we were supported by our underwriters - SBC Warburg and Hong Kong Land - up to the last minute," Nigel Rich, chief executive of Trafalgar House, said.

Mr Rich said Trafalgar would concentrate on "getting its house in order", including action to turn around the loss-making Cunard cruise-liner business.

"Once we are in control of our existing businesses Trafalgar can then re-visit acquisition possibilities at the right moment. I think the reason we originally bid - to acquire a stable UK source of earnings - is sound."

When Trafalgar first bid for Northern last December, the move was widely seen as a piece of financial engineering, designed to bolster weak trading at the company's engineering, construction and leisure operations with a regional elect ricity company's reliable cash-flow and earnings stream.

The deal would also have eased an advanced corporation tax millstone, caused by Trafalgar's shortage of UK-based earnings.

Problems at the group were highlighted in May when it announced a larger- than-expected loss of pounds 48.2m. A disastrous cruise on the Cunard subsidiary's QE2 liner, problem contracts in the engineering division and the costs of chasing Northern all contributed to the poor figures.

Mr Rich said yesterday: "I want to make the point that Trafalgar has businesses which are capable of making money if run properly. I am determined to prove that. You cannot do it overnight, it will take time."

Trafalgar's shares closed 2p lower yesterday at 41p, well below the 76p at which they were trading in December when the bid was launched.

Mr Rich's comments came almost exactly a year after he became chief executive of Traf algar House.

A former managing director of Jardine Matheson, he was installed by Hong Kong Land which had moved into the UK conglomerate in 1992, hoping to use it as a European base following the Chinese takeover of the colony in 1997.

Trafalgar's decision is the latest dramatic move in the takeover fever sweeping the regional elecricity sector.

The group started the frenzy last December and was only foiled in its bid when the industry was plunged into chaos in March by the sudden prospect of a new review of electricity prices.

In the weeks since Professor Littlechild announced the results of the review, three bids for regional companies have been made: Southern Electric International of the US has launched a pounds 1bn hostile offer for South Western Electricity, Manweb is fighting off a pounds 1bn bid by Scottish Power and Eastern Electricity has recommended a pounds 2.5bn takeover by Hanson.

Mr Rich said the rush of bids had changed the situation and forced Trafalgar to "evaluate the price at which we could succeed

"When you think of the money now on the table - which essentially would come from cash resources - it puts a lot of cash into institutions and reduces their exposure in the sector. The question you must then ask is whether their desire to hang on to the stock gets greater with each bid."

Shares in Northern jumped 9p to 905p as the market speculated that a rival bidder would step into the gap left by Trafs. Northern said it had had no other approaches.

David Morris, chairman, said he wanted to focus on running the business and on delivering the pounds 550m package of sweeteners for shareholders proposed as part of its defence.