US bid for Energy Group referred to MMC

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The Independent Online
The Government's competition policy was thrown into turmoil yesterday when Margaret Beckett, President of the Board of Trade, referred the pounds 3.7bn agreed takeover bid for The Energy Group by PacifiCorp of the US to the Monopolies and Mergers Commission.

The decision overruled advice from both the electricity regulator and the Office of Fair Trading, who had said that the deal could go ahead subject to guarantees from the two companies to protect Eastern Electricity, Energy Group's regional power business.

This is the second time Mrs Beckett has overruled the advice of John Bridgeman, director-general of Fair Trading. Shortly after the election she ordered an MMC investigation into the acquisition of two rail franchises by National Express, the transport group.

Although the MMC investigation is restricted to the Energy Group takeover, its conslcuisons are certain to have ramifications for the seven other US takeovers of regional electricty companies already waved through.

Mrs Beckett said she had decided to refer the merger because of "concerns over whether it would be possible to maintain adequate regulatory control" over the merged company. She had "carefully considered" advice from Professor Stephen Littlechild, the industry regulator, and the OFT, about regulatory assurances but concluded that would not necessarily address her concerns. The electricity watchdog, Offer, had agreed similar conditions for approving the deal to those in the other US takeovers, including guarantees that Eastern would remain "ring-fenced" from its parent. There were also special assurances that any problems with PacifiCorp's $14bn (pounds 8.6bn) debt burden following the acquisition would not hit Eastern.

John Devaney, chief executive of Eastern, said Mrs Beckett's decision was "heavy handed." He continued: "It's difficult to understand what her concerns are. Offer are satisfied with the deal. They asked PacifiCorp for undertakings and they gave them. This is a very woolly approach."

Mr Devaney warned the referral could herald a "freezing" of the whole mergers and acquisitions activity. "They have lost all semblance of certainty. People are going to ask whether they can do transactions any more. Why have these experts advising you and then say you are not satisfied with their advice?"

The attack was joined by competition lawyers, who said Mrs Beckett's statement was at odds with her most recent speech on competition policy. Speaking to business leaders last month she said competition grounds would be "the primary consideration in merger references".

Fiona Schaeffer, of solicitors SJ Berwin, said: "If UK merger policy is to encompass considerations apart from competition, there needs to be a fuller understanding of what those considerations are and how they will be balanced in the public interest."

Analysts also questioned whether Mrs Beckett had overruled John Battle, her industry minister, who last month reiterrated Labour's pre-election view that he was not opposed "in principle" to foreign ownership.

The MMC investigation means the bid will now lapse, though the timetable for the investigation, which must report to the Department of Trade and Industry by 21 November, is quicker than in some other cases. PacifiCorp, which is thought to have already spent up to $50m on the bid, said it would "cooperate fully" with the MMC but sources said it would have to consider any new conditions imposed before deciding whether to renew the offer. More than 61 per cent of Energy Group shareholders had so far accepted the 695.5p a share offer.

Energy Group shares fell 27p, to 524p, leaving some investors holding heavy paper losses. Other utility shares were also hit, with Wessex Water, the subject of recent bid speculation, dropping 12.5p to 479p.

Comment, page 19

Successful US takeovers of RECs

Bidder REC Price

Southern Company Sweb pounds 1.1bn

Cinergy/GPU Midlands Electricity pounds 1.73bn

Central & South West Seeboard pounds 1.6bn

CalEnergy Northern Electric pounds 759m

Dominion Resources East Midlands Electricity pounds 1.2bn

Entergy London Electricity pounds 1.27bn

AES and PS Colorado Yorkshire Electricity pounds 1.5bn