Sharing out the National Grid

Shareholders in seven of the original 12 regional electricity companies will receive a free allocation of shares in the National Grid shortly as part of the process of converting the National Grid from a wholly-owned subsidiary of the 12 regional companies into a separate company whose shares will be traded on the stock exchange.

The seven who are distributing their shares are London, Midlands, East Midlands, Yorkshire, Seeboard, Swalec and Northern. The remaining five electricity companies will not be sharing out their holdings for the very good reason that they are in the process of being taken over themselves. Their shareholders will receive full value for their shares in the takeover price, which will include the value of their holding in the grid.

Shareholders in the seven who are shelling out will receive National Grid shares free, but the value of the new shares they receive will come out of their original shareholdings, which will drop in price as soon as the separation is complete.

The number of National Grid shares received, and the effect on the original regional electricity share prices, will vary considerably among the seven. The regional electricity companies started off with unequal shares in the Grid company because their holding was based on the number of customers they supplied rather than on their own market value. Relative to its own market value Northern Electric had the biggest stake, Seeboard the smallest. Buybacks have also affected the number of regional electricity shares in issue.

As a result, for every 100 existing shares shareholders in Northern Electric will also get 107 shares in the Grid, Swalec shareholders will get 91 shares, London shareholders will get 85, Midlands 80, Yorkshire 75, East Midlands 71 and Seeboard just 48 shares.

Dealings in the Grid shares will officially start on 11 December, but the rights to buy shares have been changing hands at around 215p for the past week. So the good news for Northern Electric shareholders is that they will get Grid shares worth perhaps 230p for each Northern share, while Seeboard shareholders will only get shares worth 103p. The bad news is that their existing shares will fall by a roughly similar amounts.

The new owners of the five electricity companies which are being taken over have up to a year to sell their grid shares off in the market.

There will be no secondary offer for sale, and no privatisation bonanza, although there will be a secondary demand for shares from institutions which need to build up a minimum holding. The Grid will, however, be subject to the regulator, and its profits are unlikely to grow spectacularly even if the management does find more cost savings in the business.

Distributed grid shares will count as a net dividend, but higher rate taxpayers will be liable to a further 20 per cent income tax on the value of their new holding. All shareholders will have to decide whether this is the kind of share they want to hold, and a substantial turnover in the shares is likely. Small shareholders will also have to decide whether their even smaller holdings are worth retaining once they have been split. Selling the handful of Grid shares they will receive on normal terms could cost them at least pounds 15 in commission alone.

With this in mind some small shareholders may consider selling their undivided shares in the next week, before the split takes place. Others may be tempted to increase their holdings to a viable size by buying more Grid shares in the market. With this in mind the National Grid board is arranging a dealing facility which will allow shareholders with less than 500 Grid shares to increase their holdings at low cost or to sell their holdings entirely free of charges. Details of these offers will be included with share certificates, which should be sent out by 18 December.