Hanson shareholders lose £19m on TXU Europe

Hundreds of small investors are facing losses running into millions of pounds after the collapse last year of TXU Europe, the energy trading company which owned Eastern Electricity, it has emerged.

The losses arise because the investors agreed to accept loan notes rather than cash from TXU Europe when the US-owned company bought Eastern's parent company, Energy Group, for £4.5bn in 1998.

Most of the investors are shareholders in the former conglomerate Hanson which demerged the Energy Group in 1996 after its founder Lord Hanson decided to break the business up.

The administrators of TXU Europe, Ernst and Young and KPMG, have now begun writing to those investors to warn them that the value of their loan notes is likely to be negligible.

Some 800 investors who own £19m of outstanding loan notes between them, stand to lose all or most of their money. The loan notes were issued by a company called TXU Acquisitions, which was a subsidiary of TXU Europe. Even though TXU Europe's Texas-based parent company, TXU, continues to trade normally, the investors cannot claim against it because the loan notes were unsecured.

Jim Tucker of KPMG, one of the joint administrators, said he had received letters from a large number of investors owed sums ranging from £3,000 to £5,000. However, some will be owed considerably more. "They rank alongside all other creditors of TXU Europe and while the exact value of the loan notes is uncertain it is likely to be a great deal less than their face value," Mr Tucker said.

Many small shareholders in Energy Group would have accepted loan notes rather than cash when TXU's £8-a-share takeover went through in order to avoid paying capital gains tax, not realising the loan notes were unsecured.

One shareholder said TXU had paid interest on the loan notes as usual last June but when he attempted to redeem them, was told by the administrators that his chances of a payout were remote. "Morally, I think this is an outrage. TXU is still a viable company, it is still operating and raising money from the debt markets in the United States but because it decided to cut its European division adrift, the poor old loan note holders are left to sink with nothing. Why they didn't ring-fence the Energy Group assets to repay the loan notes is beyond me," the shareholder said.

Hanson is due to report full-year results on Thursday. Analysts are expecting full-year profits of about £350m and an update on the group's asbestos exposure.