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UK nuclear plans left in tatters after collapse of EDF deal

Deputy Business Editor,David Prosser
Saturday 02 August 2008 00:00 BST

EDF's senior executives are this weekend considering whether to launch a third formal bid for British Energy, after the dramatic last-minute collapse of a deal both companies had believed was almost certain to be signed.

Energy strategists said the failure of the takeover raised serious question-marks about Britain's nuclear future. The collapse of the deal is a major blow for the Government, which holds a 35 per cent stake in British Energy.

Not only are ministers sorely in need of the £4bn which EDF would have paid for the stake, the Department of Business and Enterprise had planned to trumpet the deal as a key stage in its plans for a second generation of nuclear power plants in the UK.

John Hutton, the Secretary of State for Business, insisted yesterday that the deal would not derail the Government's nuclear ambitions. "I am disappointed that talks between British Energy and EDF have not yet been successful," he said. "[But] our commitment to nuclear power is clear and nuclear new build does not depend on one single deal."

However, David Hunter, an energy analyst at consultancy McKinnon & Clarke, warned: "EDF was the Government's 'get out of jail free' card which hasn't materialised – there are tough decisions to be made as the reality is Britain will run short of power."

EDF has not yet ruled out making a further offer for British Energy, saying yesterday only that "conditions for a major development in Great Britain are not met to date". Privately, however, the company is now considering whether to explore its nuclear ambitions in the UK in another way, since this deal has collapsed.

The French company is so determined to build at least four nuclear power stations in this country that it has already begun ordering some of the components required. It already owns some land in Anglesey, adjacent to the Wylfa nuclear power station now owned by the Nuclear Decommissioning Authority (NDA). If it could persuade the NDA to sell it further land, this could be the site of its first plant.

EDF would also like to build one plant at Hinkley in Somerset, where it has also acquired land, and could add a second generator if it is able to secure more property from British Energy, which already runs a plant there. A fourth plant would require EDF to identify a new site. Such operations could even be run as joint ventures with British Energy.

The British company nevertheless hopes EDF will return to the negotiating table because a deal offers a much more straightforward way for the French company to fulfil its promise to shareholders of international expansion in the nuclear sector.

The UK is the only realistic market for this expansion and British Energy not only owns the most likely sites for the second generation of plants but also has experience of running nuclear plants in this country.

The Government also hopes EDF's rivals, including RWE of Germany and Iberdrola of Spain, will offer some competition. While both companies decided against a bid for British Energy earlier this year, they still have limited plans to operate their own nuclear power plants here.

Meanwhile, a spokesman for Centrica, the owner of British Gas, yesterday reiterated its desire to move into the nuclear sector. Centrica had been expecting to take a 25 per cent stake in British Energy once EDF completed its takeover, and is now considering its options.

A resurrection of the deal would be welcomed by Centrica, but it is understood that its executives have been holding separate conversations with British Energy and that they would explore joint venture opportunities in the absence of a French takeover. EDF's bid for British Energy collapsed late on Thursday night after the intervention of key institutional investors.

Having had a formal offer of 675p a share rebuffed in May, EDF this week increased its bid to 765p per British Energy share. It also planned to present shareholders with an alternative deal, of 700p in cash plus holdings of contingent value rights, a new type of security that would have offered further payouts over the next 10 years depending on British Energy's output and the price of the power it generated.

The value of these CVRs is very difficult to estimate, but shareholders were told they offered potential payouts in a range of £1 to £3 a share on top of the £7-a-share cash offer.

However, neither deal was considered sufficiently generous by British Energy's two biggest private shareholders.

Fund management group Invesco Perpetual, which owns 15 per cent of the company, and insurer Prudential, which has 7 per cent, were both given details of EDF's offer on Wednesday. On Thursday, Neil Woodford, Invesco's top fund manager, and his opposite number at Prudential both told British Energy they did not back the proposals. British Energy's board, headed by its chairman Sir Adrian Montague, met on Thursday evening and concluded it could not recommend EDF's offer, given the opposition from two of the largest shareholders.

The message was conveyed to the French group at 10pm, leaving EDF with little choice but to walk away.

EDF's executives are privately furious about the collapse of the deal, having arranged press conferences yesterday to unveil the takeover. The French company is understood to have believed Sir Adrian had given it a personal assurance that his board would recommend its offer to shareholders. But British Energy executives insist no such promise was made, arguing that the deal was always going to be a difficult one to sell to investors.

Mr Woodford, in particular, is well-known for his bullish view about the prospects for the energy sector. His funds, for example, hold 25 per cent of Drax, the power station operator. Nor is Invesco's view – based on the belief that oil prices will remain high, boosting the value of alternative methods of power generation – an isolated one.

The investment bank Goldman Sachs has valued British Energy at £11-a-share based on its view about trends in energy prices.

Fund manager who scuppered the takeover

Neil Woodford, the man who scuppered the British Energy takeover on Thursday night, is arguably the UK's best known and most successful contemporary fund manager. Managing around £20bn of investors' money, he holds commanding positions in many of the UK's largest companies. His two main retail funds – Invesco Perpetual Income and High Income – have returned almost 100 per cent over the past five years and are far and away the best performers in the Investment Management Association's ranking of UK equity income funds. Mr Woodford is certainly not media shy – you'll often find him expounding his market views in the personal finance sections of the weekend press – but he has always stopped short of fighting battles against individual companies through the press. Even yesterday, having played the pivotal role in breaking up a major deal in the energy sector, he refused to make any public comment on his decision. Over the past few years, Mr Woodford has become one of the most powerful figures in the energy industry, and is believed to now account for as much as 10 per cent of shares in London-listed energy companies. He joined the Henley-based fund manager Perpetual about 20 years ago, having spent the early part of his career at Eagle Star and the Dominion Insurance Comp-any. He studied economics and agricultural economics at Exeter University, very nearly going into farming before opting for a career in the financial services industry. When the US-owned Invesco took over Perpetual in 2000, Mr Woodford was one of the fund managers who fought for the business to keep its base in the Oxfordshire countryside – maintaining its unusual status as a major asset management group not based in the City of London or Edinburgh. At just 48 years old, Mr Woodford has said he hopes to continue managing money for some years to come. While some pundits have raised concern about his ever-growing pool of assets, he points to his mentor, US investor Warren Buffet, for whom £20bn would be a mere a drop in the ocean.

James Daley

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