Outlook: PowerGen deal generates many questions

THE LAST time the boys from Houston Industries went a huntin' for a British electricity company, they famously came loaded for bear. Unfortunately, somewhere deep in the woods, they encountered Sir Desmond Pitcher armed with a rocket launcher and that was the end of their ambitions to take over Norweb.

This time around the boot is on the other foot and it is Houston which is being courted by the British electricity generator PowerGen. However, rather than the blunt instrument of a knock-out bid, Ed Wallis is trying out the softly, softly approach and has sidled up to his opposite number at Houston, Jim Rogers, with the idea of a no-premium, all shares merger.

Now there is no doubting the PowerGen chairman's desire to do some kind of a deal. Having been barred from taking over Midlands Electricity, he ran the slide rule over Cinergy, the US utility which eventually acquired Midlands. Nor is there much question that PowerGen needs to do something, faced with the prospect of a declining share of the domestic generating market, shrinking profits and little evidence that this Government is better disposed to vertical integration than the last one.

But is Houston Industries the answer? There is no overlap between the two so there are no cost-savings to be had. And PowerGen scarcely needs to go to the expense and trouble of merging with a US electricity retailer to learn how it might attack the UK domestic market once it is liberalised.

Even if the problems of clashing egos, US regulatory approval and how to maintain a quote in blue chip indices on both sides of the Atlantic could be overcome, such a merger still poses more questions than answers. PowerGen has to ask itself what the point is of merging with a US business which is also beginning to feel the effects of deregulation, increased competition and pressure on margins. Together they could end up like two drunks propping one another up at the bar.

If on the other hand, the deal does genuinely fill a hole for PowerGen, then Houston shareholders have to ask what is in it for them, since US utilities are more highly rated than their UK counterparts.

PowerGen has rather been pushed into searching for a big overseas deal by the closing of doors back home and its slowness, compared to National Power, in building up an overseas generating portfolio of its own. But it is a high-risk strategy which shareholders should not encourage by giving Mr Wallis the ammunition.