Consumers face long wait for their share

ANALYSIS

The City, not the consumer, would be given first call on the savings expected from job losses and rationalisation over the rest of the decade in North West Water's bid for Norweb .

This proposal is fundamental to the strategy devised by North West Water and its City advisers, Kleinwort Benson, to convince investors that the merger of two such different animals should be taken seriously. North West Water argued that if the City was to put up the cash to finance the takeover then it should have a prior claim on the benefits.

Brian Staples, chief executive, said: "It is shareholders who are putting up the cash, not customers, and shareholders first have to see a return. That is an equitable situation ... We have a good degree of confidence that we will get approval."

For the first five years, the money will go to shareholders as higher dividends, and only after 2000 will customers begin to see any effect on their bills, spread over five years.

North West Water believes that Ian Byatt, the water regulator, will agree. His office, Ofwat, has so far been guarded in its response but said that any suggestion that there has been a prior agreement would be "somewhat cheeky". But while the watchdog is due to publish a consultative document on the issue next week, there are hints already that immediate cuts for customers will not be put back on the agenda by the water regulator.

Ofwat takes the line that mergers between water companies are, in principle, against the public interest since it reduces the number of companies in the industry between which Mr Byatt can make comparisons of efficiency - the basis on which he sets price controls.

But a spokeswoman for Ofwat said yesterday: "This [latest merger proposal] is not the same as a merger between water companies, and the same sort of savings might be difficult to achieve. We are far less likely to see immediate benefits for consumers - it would probably have to emerge over time."

Sir Desmond promised the companies would be kept as separate subsidiaries of a new umbrella group, United Utilities. This will allow the electricity and water regulators to retain a firm grip on the businesses. Sir Desmond added that he saw no impediment to the merger from the regulator.

North West Water may find Ian Lang, President of the Board of Trade, more difficult to convince. With a cross- party political uproar breaking out, Mr Lang may be tempted to refer it all to the Monopolies and Mergers Commission.

It will be hard to use a reduction of competition as an excuse, because there is none between the two companies. But Mr Lang may well use his powers to call for an inquiry on public interest grounds or to investigate the complex regulatory problems such a novel combination could throw up.

The complaints from politicians, consumers and unions were not echoed in the City. The most convincing financial argument for the takeover put to investors was based on the savings expected from merging the corporate headquarters and combining services.

Sir Desmond believes the company will be able to sell its services to third parties Another benefit will accrue because the combined company will pay less tax through mopping up unused allowances. There will also be, the company claims, a "more efficient and cost effective" capital structure, a result of relying more heavily on borrowings from banks.

Add all these changes together and it should be easy to boost the dividend, which could be enough to swing the argument with shareholders.