Innogy's customer base soars to 7 million

The power group Innogy consolidated its position as the UK's leading electricity supplier through its power retail arm yesterday, after agreeing to swap its Yorkshire Electricity distribution business for the electricity and gas customer base of Northern Electric.

Analysts welcomed the move as it increases Innogy's exposure to higher-margin business, with 6.6 million domestic gas and electricity customers, and boosts its lead over US group TXU, the owner of Eastern and Norweb, with 6 million customers. Centrica, the owner of British Gas, remains clear market leader with 18.5 million domestic customers. Martin Brough, an analyst at Dresdner Kleinwort Wasserstein, summed up the mood by saying that the deal was a reasonably good move strategically, but that Innogy may become a more attractive takeover target because of its enhanced customer base.

Brian Count, Innogy's chief executive designate, said: "We do not wake up in the middle of the night and worry about someone putting an offer on the table. We are confident of our position and think it is in the shareholders best interests to remain an independent company." The deal will cut the company's debt by almost a quarter, but will lead to job losses as Innogy concentrates on delivering value.

Under the terms of the deal, Innogy is selling its 94.75 per cent interest in the Yorkshire electricity distribution business for £262m to Northern Electric, owned by the billionaire investor Warren Buffett through his MidAmerican Energy Holdings. Northern Electric will assume £742m in net debt from Innogy.

In turn, Innogy will pay £257m, about £275 a customer, for Northern's supply business of approximately 1.57 million customers, which will take its customer base to about 7 million.

Ross Sayers, Innogy's executive chairman, said the asset swap "establishes Innogy as the number one electricity supplier to households and businesses in the UK and the number two supplier in gas, by volume."

In cash terms the deal will result in a payment to Innogy of £5m but reduces the company's net debt by just over £700m to £2.2bn and allows it to swap a lower return distribution business for a higher return supply business. Innogy's Mr Count said the move brought "no surprises", as the company had made it clear it intended to unlock capital from distribution.

Innogy will be able to raise its four-year cost savings target by £25m to £60m a year. The job losses will result from Innogy rationalising IT, sales and services, billing and other operations. "I would not deny there are job losses that will come from this," Mr Count said. "But it does not help staff or trade unions to speculate.

Regulatory approval will be needed for the deal to go ahead, but Mr Count said: "We do not see any competition issues. We would be mightily surprised if any come up."