US bidders for Energy clash over $2.8bn Texas share plan

A FRESH WAR of words broke out last night between the rival US bidders for Energy Group after one of them, Texas Utilities, was forced to disclose that it may issue shares worth up to $2.8bn to help finance its offer for the company.

The rival bidder PacifiCorp said the statement, made at the request of the Takeover Panel, raised questions about whether Texas could issue that amount of equity. PacifiCorp's advisers also suggested it cast doubt on Texas' ability to finance the $10bn debt facility it is using to finance the bid.

Texas is bidding 840p a share for Energy Group, the parent company of Eastern Electricity, valuing the company at pounds 4.45bn. This compared with an 820p-a-share bid from PacifiCorp.

Texas, which is advised by Lehman Brothers and Merrill Lynch, will pay out a total of $237m in fees if its bid succeeds. This is about twice the level of fees being paid by PacifiCorp, which is advised by Goldman Sachs.

The Texas offer trumped a 820p-a-share bid from PacifiCorp. However, PacifiCorp already has regulatory approval for its bid while Texas will have to wait until next month to see whether it has escaped a referral to the Monopolies and Mergers Commission.

PacifiCorp also questioned why the full extent of Texas' plans for issuing equity were not disclosed in its offer document, when it was published last week.

A Texas spokesman responded by saying: "We are delighted to have been given the opportunity to demonstrate that we have the capacity to issue equity, unlike others."

Texas said that the $2.8bn would be made up of $1.5bn of equity and the balance in preference and convertible securities. The company has already said that up to 20 per cent of its offer could be met by issuing shares. At the time of its bid it also indicated its intention to issue about $1.4bn of new equity after it had acquired Energy Group.

If it raises as much as $2.8bn in shares, then nearly 40 per cent of the bid will have been equity financed. PacifiCorp's bid is 25-30 per cent equity financed.

About 20 per cent of Energy Group's shares are held by US investors in the form of American Depository Receipts.

However, it is highly unlikely that all these shareholders will take Texas paper whilst virtually all the UK institutions are guaranteed to take the cash.

Texas is paying its two financial advisers, Lehman Brothers and Merrill Lynch, $20m in advisory fees. However, its offer document shows that total fees, costs and expenses associated with the offer will be pounds 144m or $237m. The credit facility has been arranged by Lehman, Merrill Lynch and Chase Manhattan.

Erle Nye, chairman of Texas, said the acquisition of Energy Group was consistent with its strategy of delivering long-term earnings growth. However, PacifiCorp challenged Texas to say whether the deal would be earnings enhancing or dilutive if it issued as much as $2.8bn in new equity.