As the scale of the planned payments became known, Labour last night renewed its attack on the Government for not referring a £1.2bn takeover bid for Northern Electric to the Monopolies and Mergers Commission. Jack Cunningham, shadow Trade and Industry Secretary, said the Government had failed to protect electricity customers while allowing huge gains for investors.
A number of the newly privatised companies are planning to follow the lead set by Northern Electric last week with financial reconstructions which will mean massive payouts to shareholders. According to some City analysts, the eventual handout could be as high as £6bn, which is more than the industry was sold for at privatisation in 1990.
The plans, involving the companies taking on substantial borrowings to fund the payments, have been prompted by the threat of takeovers among the electricity companies. However, industry sources concede that they are in part motivated by the possibility of a Labour government renationalising the power companies. "The industry is determined there should be nothing left for Labour to plunder by the time of the election," one source said.
Northern Electric last week offered £560m in cash and shares to persuade shareholders to reject a £1.2bn bid by Trafalgar House. Other regional electricity companies, including East Midlands, are planning similar moves even though they are not yet the subject of takeover bids.
Mr Cunningham said: "If all this money is available why can't it go to consumers?"
Nigel Hawkins, analyst at Hoare Govett, said: "The bid does put pressure on other companies to do something dramatic in terms of payout." He said that the question is whether the companies act quickly, or wait until a predator comes along.
Mr Hawkins added: "There is really a significant imbalance here between benefits for customers and shareholders." He said that the ability to offer huge payouts to shareholders raised the issue of whether the companies got off too lightly when their electricity distribution prices were reviewed last year by the regulator, Offer.
However, one company said that there is a danger of the sector panicking in the midst of takeover speculation and acting too quickly. "Our view is that Northern has gutted itself but that it had no choice," he said. "Now the company is totally unable to diversify, is having to cut back on capital spending and will be under great pressure should there be a rise in interest rates."
Some of the regional companies are awaiting the outcome of negotiations with the Government over the planned sale of the National Grid Company, thought to be worth up to £5bn, before deciding on the timing and size of the handouts.
The value of the National Grid is about as much as the value of its 12 regional parents when they were privatised in 1990. The regional companies are still at loggerheads with the Government over how much of this windfall should be given back to customers in the form of a rebate. The companies have offered a rebate of £10 per customer but the Government is holding out for much more.
When Northern launched its final defence against Trafalgar House on Friday, the document made no offer of a rebate to customers. Northern is funding its offer through bank borrowing and will increase its ratio of debt to equity to 225 per cent.
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