View from City Road: An embarrassment of riches

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The Independent Online
From the moment Professor Stephen Littlechild opened his mouth on 11 August, it was apparent to all that his review of price controls for the electricity industry had been unduly lenient. It has only slowly dawned just how lenient, however. Since the announcement, shares in the regional electricity companies have risen by more than 20 per cent and barring a market correction, there's probably more to come.

Even after five years of manpower cuts, the electricity companies still have huge scope for cost savings, far more than Professor Littlechild assumed when he did his calculations. Norweb found another 1,200 spare bodies to axe yesterday. Modern working practices, management techniques and technology make the potential for cost-cutting almost boundless - at least 30 per cent according to Salomon Brothers.

It is not as if the electricity companies are stretched. In the year to March the 12 regional companies increased their cash position by pounds 900m. Though Professor Littlechild expects them to have to take on debt to meet his new price controls, it is plain the companies themselves do not, or certainly not on the scale he envisaged. Unlike the water companies, they do not have pressing capital spending needs, and will remain strongly cash- generative until the end of the decade.

As if that were not enough, the companies also jointly own the National Grid Company, likely to be floated over the next two years on a market value of something over pounds 4bn. After the East Midlands fiasco, few electricity companies harbour plans to diversify significantly. What then to do with their excess of riches?

Seeboard set the ball rolling this week with a share buy-back that is likely to snowball into the winter as other companies follow suit. All have been authorised by shareholders to buy up to 10 per cent of their shares back, which could get rid of more than pounds 1bn of surplus cash. By boosting earnings per share, these buy-backs could accelerate growth in dividends from a likely 7 per cent in real terms to around 10 per cent.

So rock-solid a financial proposition have the regional electricity companies become that it is not only take- overs that are mooted but even leveraged buyouts by managements.

Only a hostile Labour government looks likely to stop the party, and even if one were elected in 1997 that could take a couple of years to implement by way of windfall taxes and the like. What a business.