For sale: Scots atomic pride

Sunday, March 23, 2008

Back in 2002, British Energy, the largest power generator in the UK, hosted a Burns Night dinner. Appropriately for a company fiercely proud of its Scottish roots, it was held at the historic Caledonian Club close to Hyde Park Corner in London. Its then chief executive, Robin Jeffrey, wore a kilt, as did many other employees, along with supportive Scottish politicians who attended. In keeping with tradition, diners stood to attention as the cook, accompanied by a bagpiper, brought in the haggis on a large dish. Jeffrey, himself a Scotsman, led the toasts, even reciting a witty ditty - witty to the audience, anyway - asking the government for a larger subsidy.

But such proud manifestations of its Scottish heritage could soon be a thing of the past. Last Monday, British Energy announced it was in discussion with unnamed 'interested parties' which could lead to a takeover of the company. At the front of the queue, as ever, are the German firms Eon (which owns Powergen in the UK) and RWE, owner of Npower, along with the ubiquitous French group EDF.

Rival French firm Suez, Spanish-owned Scottish Power and British players Centrica and Scottish and Southern Energy have also been in negotiations with British Energy.

These companies are all interested in building or operating new reactors in the UK or buying electricity from them. While British Energy's existing plants are ageing and unreliable, the sites it owns are the most suitable to host new power stations, putting the company - or its new owner - in pole position for any new-build programme.

When British Energy began talks a year ago, it said the aim was to find joint venture partners to build and operate a generation of new reactors. So what changed to make takeover a possibility - and what will happen to the company?

British Energy's future is in the government's hands. Westminster will decide who builds new reactors and how this happens. Since all but one of British Energy's existing plants are set to close within 15 years, without new-build it does not have much of a future.

More importantly, the state owns a 35 per cent stake in the company - a legacy of the government's bail-out shortly after the raucous Burns Night dinner of 2002. As well as being able to block any takeover, as the largest shareholder the government can prevent anyone from buying 15 per cent or more of the company without its permission, and British Energy from selling any of its existing reactors.

In other words, the government is in control. As Lord O'Neill of Clackmannan, former chairman of the select committee overseeing the energy industry and now chairman of trade body the Nuclear Industry Association, puts it: 'No one other than [energy minister] Malcolm Wicks or [Secretary of State for Business, Enterprise and Regulatory Reform] John Hutton really knows what will happen to British Energy. Everything else is just pure speculation.'

But in recent months, Westminster has been steadily relaxing its grip on the company. Talking to The Observer in late October, Hutton indicated that the government would not hand out 'special favours' to British Energy. Neither would it try to block foreign company involvement. 'We are not going to intervene to advance particular corporate interests,' he said. 'There will be British company involvement. But there is a market out there ... so there won't be special favours for any company.'

Then earlier this year, after the government had given the green light to new nuclear reactors, officials contacted the industry executives who were also talking to British Energy. EDF, RWE, Eon and the others were assured that the government would not exercise its veto if a bid were made for British Energy. Some or all of the state's stake - worth at least £2bn - was up for grabs, too. A sale of the whole stake would automatically trigger a takeover for the whole company. (The government has since appointed investment bank UBS as an adviser, with Rothschild advising British Energy.)

From that point, the race to snap up British Energy - and seize its valuable sites - was on.

But nothing is ever simple when it comes to the nuclear sector, particularly where the government is involved. If British Energy was sold in its entirety to one buyer, that purchaser would subsequently have a stranglehold on the best sites. Indeed, barring competitors from building new reactors in this way is one of the biggest attractions of buying the company. Yet this would be anathema to the government's free-market ethos.

Moreover, giving one company the best sites could mean that, by effectively ruling out any pressure from competition, the new reactors could end up more expensive to build and operate - costs that would be passed on to electricity consumers.

One idea is to split British Energy into two companies: one legacy business holding its existing eight reactors and the other focusing on new-build. The government could therefore get rid of its stake by allowing the takeover of the legacy business, keeping British Energy's ownership of its sites independent.

But the companies with which British Energy is holding takeover discussions are after its sites, not its existing plants. Lakis Athanasiou from analyst firm Evolution Securities sums up the dilemma facing the government and British Energy's suitors: 'There is no question that the government's major priority is to sell its stake. It will also want to see a mixture of companies involved in [new-build]. But if you are forced to share its sites, why are you buying the company?'

Another idea is to press ahead with a sale of the government's stake this year - on condition officials are allowed to run a competitive open auction for the company's sites for new-build. Companies bidding for British Energy would be reassured that owning it would give it an advantage when it came to bidding for the sites.

None of the companies interested in British Energy have operated reactors in the UK before. This means a new owner would have the chance to improve on the company's poor operational performance, and to impress regulators and the government ahead of the bigger prize, which is the auction of the sites. But Andrew Moulder, a credit analyst from CreditSights, cautions that taking on British Energy's unreliable reactors could do more harm than good to a company's reputation.

Whatever happens, it seems likely that British Energy will soon be neither Scottish-, nor British-, owned. Lord O'Neill says this wouldn't really matter - and he would be right. 'Blinding ourselves with the Union Jack is not the best way to do it,' he says. 'Energy is an international business.' But the Caledonian Club may lose a member in the process.

Who might buy it

There is no guarantee of a takeover of British Energy. One of the firms below - or a combination - could take a minority stake in British Energy or start a joint venture to build nuclear reactors.

EDF: Vincent de Rivaz, chief executive of the UK arm of the French nuclear energy giant, has been most vocal in talking up his firm's credentials. He promises EDF will build the first new reactor by 2017. A strong contender.

RWE: The firm operates reactors in Germany and is keen to expand. The German press reported last week that RWE was planning a £2bn bid for a minority stake in British Energy.

Eon: A strong contender to buy British Energy. It's not clear if the three giants - EDF, RWE and Eon -would be willing to work together in a joint venture or if they would prefer to go it alone.

Scottish and Southern Energy: Could in theory bid against the big three, but unlikely to be able to compete financially with the Europeans, which are able to raise debt more cheaply because of their state backing.

Centrica: The owner of British Gas is likely to play a supporting role. It has no expertise in running nuclear reactors but would be interested in signing long-term supply contracts from new reactors built by British Energy or its new owner.

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