View from City Road: A licence to make money

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The Independent Online
First he stopped East Midlands Electricity pouring its torrents of shareholders' money down a bewildering variety of drains. Now the new chairman, Nigel Rudd, seems to have devised an equitable way of handing the company's cash back to its rightful owners.

More evidence, if it were needed, that the highly paid, highly incentivised managements of the privatised utilities could learn a thing or two from people who have been running businesses in the real world for rather longer.

In essence yesterday's special dividend is similar to the other eight buy- back schemes announced over the past couple of months. It increases earnings per share by reducing the number of shares in issue and it uses up the embarrassing amounts of cash being generated by the industry before the Government realises its mistake and tries to get some of it back.

This is clearly a big advance on what has gone before, however. Offering all shareholders a dividend while consolidating the shares has two advantages over buying in the shares of a handful of already pampered pension funds.

First, it treats Mrs Smith of Nottingham's 200 shares in the same way as the Pru's 10.6 million. They both get 85p a share and, assuming Mrs Smith is not a taxpayer, both qualify for a tax credit on what the Revenue has confirmed is income for tax purposes.

Next, it is fair to East Midlands' employees, the value of whose share options remains unchanged because the 85p hit to the share price implied by the dividend is neatly reversed by the consolidation of 25 existing shares into 22 new ones.

Shareholders won't mind too much that the main beneficiaries of those options are the company's directors since, this time at least, they seem to be doing their job.

Having taken a pounds 130m charge in May to cover the cost of getting out of a string of hare-brained diversifications, the company is expected to make the best part of pounds 200m this year from its core supply and distribution business. With a licence to print money like that, it seems crazy that any of the regional electricity companies (East Midlands was far and away the most profligate) should ever have considered risking their shareholders' funds in activities governed by the normal rules of business.

Having made the tacit admission that the regulator let the industry off too easily in the summer, East Midlands and its peers must accept that the Government will want to take a sizeable slice of the estimated pounds 5bn proceeds of selling the National Grid.

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