National Grid eyes $7bn bid for US gas supplier

If National Grid were to win an auction for the company, it would be its fifth major acquisition on the north-east seaboard and take its total spending on such deals to more than $20bn in six years. It would also mean that the group's US businesses would account for more than half its earnings.

National Grid faces likely competition for KeySpan from Consolidated Edison, the US energy giant which is also looking to expand in the north-east. KeySpan shares surged after it admitted it was in talks with several bidders, which it did not name.

The reaction sent KeySpan's valuation to $7bn, above the $6.5bn at which the most recent bids are believed to have been pitched. National Grid would not comment, but its shares closed down 9.5p at 578.5p as news of its interest spread.

KeySpan has 2.6 million gas and electricity customers and is the fifth-largest gas supplier in the US. It has power-generation assets that supply a quarter of the electricity to New York City.

The revelation of National Grid's interest in KeySpan comes in the same week as it spent $498m on another company in the same region, Southern Union's Rhode Island gas distribution business. It broke into the US market in 2000 with purchases of the electricity transmission and distribution companies, NEES and EUA, for a total of $5.6bn. Two years later it unveiled the $9bn acquisition of Niagra Mohawk.

The US utilities landscape is being dramatically reshaped after pressure from companies to liberalise laws that limit inter-state mergers. Consolidation has attracted some criticism from consumer groups, but it is expected to accelerate in future years. Last year, Warren Buffett, the veteran investor, paid $5.1bn to buy the electricity company PacifiCorp from ScottishPower.

Unlike ScottishPower, whose US adventure proved a financial disaster, National Grid has attracted plaudits for its step-by-step expansion and its concentration on overlapping acquisitions in the north-east. Last week, Steve Holliday, the chief executive-designate, signalled his intention to make further acquisitions in the region.

Robert Catell, KeySpan's chief executive, said talks with several parties may not necessarily result in a bid. "However, as our industry has evolved, we believe it is appropriate to explore all alternatives that may be in the best interests of all our stakeholders, particularly the customers we serve," he said.

KeySpan shares have fallen 10 per cent in a year because higher wholesale gas prices forced the company to raise prices, driving down customer usage and causing more to fall behind with their bills.