View from City Road: The whole v the sum of its parts

WHETHER the re-privatisation of British Gas, if that is indeed the eventual outcome of its odyssey through the Monopolies and Mergers Commission, will be good for its shareholders is a key question for the next nine months or so.

Analysts, armed with heroic assumptions, have done their sums. Some reckon that by demerging British Gas into an exploration and production company, gas marketing activities, a pipeline operation and regional gas distribution companies on the model of the electricity industry, you could add pounds 3.5bn or 80p to the current market worth of pounds 10bn at 237p. These appealing calculations are not to be taken too seriously, since they beg the question of how many changes in the operating ground rules for gas will be made by the MMC. Pipeline pricing is, after all, at the heart of the row between Ofgas and British Gas.

At the same time, such a wholesale restructuring of the gas industry is bound to increase costs because of widespread duplication of information technology, management overheads and support services. This would restrict dividend-paying potential.

And a British Gas sub-divided into independent parts would be easier for Ofgas and the Office of Fair Trading to deal with.

Such an arrangement would be a less fraught way of reducing British Gas's share in the non-tariff gas market from a current 85 per cent to 40 per cent, as the OFT has demanded. The welfare of the domestic customer would probably remain in the care of Ofgas.

Certainly the current state of affairs is wholly unacceptable. A disturbing message from British Gas's interim figures is that management appears to have gone on hold in the face of the MMC inquiry.

Admittedly 70 per cent of a 30 per cent fall in profits was due to weather, but the rest stemmed mainly from encroaching competition. Tariffs are eventually being cut, yet operating costs are rising rather than falling in line with inflation, and necessary restructuring has been put on the back burner.

An 8 per cent yield and the company's promise of real dividend growth has dragged the shares back off the floor in a volatile stock market. A defensive hold with obvious flaws.