BG pleases City with plan to demerge gas pipeline and overseas businesses

BG yesterday unveiled a £12bn plan to demerge its domestic gas pipeline business, Transco, and its international operations into two separately quoted FTSE 100 companies.

The long-awaited move could herald a takeover of a water company by Transco, while analysts said that BG International, the overseas exploration arm, could itself become a bid target.

The two companies are expected to emerge with roughly equal market capitalisations when the demerger is complete in October, while Transco will assume all BG's £7bn in debt. Shares in BG surged 10 per cent on news of the demerger to close at 337p, valuing the group at £11.8bn.

The highly rated duo who run BG, the chief executive David Varney and the finance director Philip Hampton, both intend to leave when the demerger is complete. Mr Varney will receive a pay-off of £500,000 and Mr Hampton £360,000.

There has been growing speculation that BG would demerge its domestic and overseas interests since it separated them into legally distinct businesses a year ago and issued a £1.5bn "Transco bond" to help fund its heavily regulated gas pipeline operations.

Mr Varney said that the decision had been taken to demerge now because there was evidence that the group structure was holding the two arms of the business back.

Transco received a proposal to merge with an unnamed water company recently but was unable to take the idea any further because BG International was not keen on the move.

Meanwhile, BG International has increasingly found itself being prevented from entering joint ventures in overseas markets because it was owned under the umbrella of BG.

"They are like an older brother and a younger brother, one is always being compared with the other," said Mr Varney. "Both businesses kept coming up with plans to grow and we found ourselves in the position of having to make an either/or choice."

Transco, which made adjusted pre-tax profits last year of £762m, hopes to move quickly to build a telecoms business around its gas distribution network. It has more than 700 towers around the country which could act as aerial sites for a new third-generation mobile telephone operator.

BG also said that Transco would work with the energy regulator Ofgem to unbundle activities such as metering from its core monopoly business of gas transmission.

BG International, which increased profits from £42m in 1998 to £159m last year, is growing rapidly and recently bought Comgas of Brazil for $1bn. It aims to continue the expansion of its exploration and production division, which now accounts for 60 per cent of assets, by developing new sources of oil production as well as gas.

However, analysts suggested it could become a takeover target, citing Royal Dutch Shell, ENI of Italy and Spain's Repsol as companies which could be interested in buying all or part of the business.

The chief executive of Transco will be Phil Nolan and its chairman will be Dr John Parker. Frank Chapman, currently president of BG International, will become chief executive. Dick Giordano, currently the chairman of BG, will stay on as the chairman of BG International. Mr Giordano, who joined British Gas six years ago, is 66 tomorrow.

The Government will retain its golden share in Transco to prevent it falling under foreign ownership. BG International, meanwhile, will retain the rights to the British Gas name outside the UK and the power to veto any sale of the trademark as a result of Centrica being taken over.