Midlands `yes' to PowerGen bid

Electricity: Monopolies inquiry likely as generator plans expansion in distribution business

PETER RODGERS

BusinessEditor

PowerGen yesterday made a pounds 1.95bn agreed offer for Midlands Electricity and revealed that it planned to become a nation-wide supplier of electricity under its own brand name.

Ed Wallis, chief executive of PowerGen, said the company would sell electricity nationally to householders from 1998, when the supply market is opened to competition.

He made clear that one of the reasons for buying Midlands was its expertise in billing and marketing. This would help PowerGen expand electricity supply, which it believes is the area of the power industry with the most potential for growth. "Our idea is to become a nation-wide supplier" said Mr Wallis.

PowerGen, as a supplier of bulk electricity, had only 350 customers and its systems were set up to cope with that. Midlands, in contrast, has around 2.5 million customers and the necessary systems. He envisaged PowerGen marketing its electricity all over the country from 1998, with a customer from as far away as Folkestone billed from the same centre as one in the Midlands.

Mr Wallis offered no benefits to consumers but said they would come through in the greater competition in the market. He also promised to maintain Midlands' decision to freeze electricity prices from April 1994 to March 1996 and said the company had brought down the overall bill to consumers in real terms by 15 per cent since privatisation.

The offer, of 800p cash per share and a special dividend of 200p net a share, values each Midlands' share at pounds 10, or pounds 10.50 for tax-exempt investors - the pension funds - because of a tax credit carried by the dividend. PowerGen was buying Midlands shares aggresively in the market yesterday. The volume traded suggested it may have snapped up more than 10 per cent of the target.

The deal was hammered out over the weekend and not agreed until a handshake at 10.00pm on Sunday. The bid still faces regulatory clearance

Although Ian Lang, president of the Board of Trade, has approved Scottish Power's bid for Manweb, which involves vertical integration between a generator and a distributor, he also made clear he would treat further bids case by case. Professor Stephen Littlechild, the electricity regulator, has hinted he would like the bid referred.

In an attempt to avoid a reference, Mr Wallis, offered full cooperation in adapting the regulations to cope with the new structure to be created by a combined generator and a regional power distributor. In England and Wales, generation was separated from distribution at privatisation but the lines have become increasingly blurred.

This process was taken a stage further when PowerGen agreed yesterday to sell 2,000 megawatts of generating capacity to Eastern Electricity, the regional company being taken over by Hanson. The sale, which results from an order last year by Professor Littlechild to reduce capacity at PowerGen or face a monopolies reference, will cut the company's market share to 19 per cent.

Eastern will make lump-sum payments of pounds 200m and pay annual rent and earn delayed performance payments of around pounds 40m a year for the first five years, reducing in the three following years.

The stations, Drakelow C in Staffordshire and High Marnham, North Nottinghamshire, are both coal-fired. John Devaney, chief executive of Eastern, said: "This agreement is a major step in enhancing competition in generation."

Mr Wallis acknowledged the sensitivity of the regulatory issue. "When we are selling our own generation to our own supplier, that is where we could abuse our position and that is where it has to be very open and very transparent. We would accept that." He said the bid would double the boost to growth of earnings per share that would be delivered by the share buybacks favoured by some other companies.

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