S&SE abandons £1bn Midlands takeover

Scottish & Southern Energy, the UK electricity company, yesterday walked away from the £1.1bn takeover of Midlands Electricity after failing to agree terms with the company's bondholders.

The breakdown of the deal increases the risk of Midlands, which serves 2.3 million customers in central England, being forced into administration. The energy regulator Ofgem said it was monitoring the situation. Ian Marchant, S&SE's chief executive, said S&SE had decided not to proceed with the takeover after it became clear that its terms were not acceptable to bondholders.

Bondholders were being offered £567m - equivalent to 86p in the pound - while S&SE was taking on a further £502m in debt and paying £43m for its equity. S&SE's takeover of Midlands was announced in May this year after protracted talks with its two cash-strapped US owners, Aquila and FirstEnergy. The deal would have provided an injection of badly-needed investment into Midlands, which has been fined by the regulator for poor performance.

The takeover would also have transformed S&SE into the country's biggest electricity distributor with 5.7 million customers and three big distribution networks stretching from the South Coast to the Scottish Highlands.

At the time Mr Marchant likened the talks to "buying a house with subsidence and negative equity from a divorcing couple". Yesterday he said: "We believe the enterprise value we offered for Midlands was fair, based on months of careful discussions and due diligence. But discipline remains our watchword and we are not prepared to jeopardise shareholder value by paying more."

Mr Marchant added that there remained "major opportunities in the UK energy market" although the company conceded that there were not other electricity distributors likely to come up for sale.

The collapse of the takeover will increase speculation that S&SE will decide to return cash instead to shareholders. Analysts estimate that it could afford to return up to £1.5bn. A spokesman said a return of capital to shareholders had never been off the agenda and was always the yardstick against which it measured takeover opportunities.