Pairing up for greater power

News Analysis: Southern and Scottish link may herald second merger wave

SOUTHERN ELECTRIC yesterday became the last of the12 UK regional electricity companies (RECs) to lose its independence, as plans for a near-pounds 5bn merger with Scottish Hydro-Electric were announced.

The deal could herald a second wave of industry retrenchment following the first when predominantly US groups bought in to the British energy supply sector.

The latest no-premium transaction would see Southern shareholders owning 55 per cent, with Scottish taking 45 per cent of a group called Scottish and Southern Energy (SSE).

The all-share deal has yet to be approved by shareholders from both companies and industry regulators. Analysts say the merger should be approved by the authorities but said this could not be guaranteed.

Southern has failed to consummate previous proposed agreements with National Power and Southern Water after the government stepped in. But the latest deal was welcomed by the City, with Scottish shares rising 11.5p to 564p and Southern rising 4.5p to 565p.

Under the terms of the deal, Scottish shareholders will retain their shares and Southern shareholders will receive one new Scottish and Southern Energy share for every Southern Electric share. The new group will join the FTSE 100 index of Britain's leading firms with a market capitalisation of pounds 4.87bn.

Scottish shareholders stand to gain most initially because the new group will adopt Southern's dividend payments. This means a 22 per cent dividend increase for Scottish shareholders. But Southern has the top management positions, with its chief executive, Jim Forbes, taking the same title in SSE. His colleague, Ian Marchant, becomes finance director.

Boardroom squabbling for the top post was avoided because the Scottish chief executive, Roger Young, had already told colleagues he wanted to stand down next year. Mr Young, who like Mr Forbes is highly regarded by the City, will become joint deputy chairman of SSE. The chairman will be Lord Wilson of Scottish.

Southern is also likely to bare the brunt of job cuts because SSE will be based in Perth at Scottish's headquarters rather than Southern's Maidenhead offices.

Mr Forbes says the new company will create more jobs in the long term as it has expansion plans, but analysts predict up to 800 jobs could go, mainly from Southern's 6,000 staff. Scottish employs half this number.

Cost savings will not just come from job losses: big benefits are expected from eliminating duplicated information technology and customer service costs. Management on both sides say they have also found that huge savings would be available from joint purchasing on capital expenditure.

Mr Young said the deal would give Scottish the critical mass it did not have on its own with a combined customer base of 3.3 million and extra firepower for new acquisitions.

Mr Forbes made it clear that SSE can be expected to bid for coal-fired power stations being sold off by PowerGen and National Power.

But a bid for London Electricity, long expected from both Southern and Scottish independently, looks less likely now. London's owner, Entergy, is known to be looking for a full price and should attract bids from companies such as British Energy and Thames Water.

Senior management at SSE has told the Office of Fair Trading about its deal but said it was confident it would not be referred to the Mergers and Monopolies Commission .

Mr Forbes pointed out that Scottish has only 5 per cent of the generating market in England and Wales. He expects to hear by October whether the OFT plans a full examination.

But with PowerGen's planned takeover of East Midlands Electricity still awaiting government approval, analysts say that the Trade and Industry Secretary, Peter Mandelson, might call for a review of the sector. The Government has a small stake in Scottish so Mr Mandelson could intervene if he chose to do so.

In what could reinforce the new wave of consolidation, National Power is also expected to make a bid for either Yorkshire Electricity or Seeboard. The US companies which prompted the first wave of UK energy consolidation have begun to retreat.

Of the other 11 regional electricity companies set up at privatisation in 1990, seven are now in US hands and four have been taken into multi- utilities.

At the same time British companies such as PowerGen and the National Grid are openly chasing assets on the other side of the Atlantic as a first step towards globalisation.

Mr Forbes and Mr Young stressed that SSE's main focus at present is the UK market, but they held the door open for overseas ventures later on.