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Lights go out on British Energy bid

Created:
1 August 2008
Written by:
Claer Barrett

• Discussions continue but no agreement reached

• EDF says 'conditions are not right' for major investment

• Major British Energy shareholders reportedly holding out for higher price

If British Energy thought that EDF's state backing meant it would be prepared to write a blank cheque in order to take over its UK counterpart, it has been proved wrong. The French generator said in a terse statement that the "conditions for a major development in Great Britain are not met to date". For its part, British Energy said that talks are continuing.

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But soaring prices for wholesale power prices have reportedly caused major shareholders Invesco and Prudential to get cold feet. There's no official comment from either, but The Times reports that both wanted a higher price.

EDF, the world's biggest nuclear power generator, had attempted to assuage this concern by offering a 'contingent value rights' (CVRs) security that would make future pay-outs dependent on British Energy's post-takeover performance, in addition to a 700p a share cash element. The idea was that investors worried about missing out on future upside could opt for this rather than a 765p a share outright cash bid.

British Energy shares fell 5 per cent to 695p on the news. Those of Centrica, which was a minority partner in the proposed deal, fell 3 per cent. Centrica was set to pay around £3bn for a 25 per cent stake, largely to cloak EDF's bid in a union flag.

What now?

Opinion remains divided as to whether the talks can be salvaged. "We don't believe that the takeover deal is dead, but the end game has not yet been reached and has been pushed to September at the earliest," said utilities analyst Angelos Anastasiou of broker Pali International.

"Nuclear new build remains a central plank of government energy policy, so we believe there will be behind-the-scenes pressure for a deal to be reached. It is possible that some of the previous potential bidders could resurface, but given that they seemed to back away on possible price issues, this seems relatively unlikely."

British Energy and the government could now revert to a back-up plan of forming joint ventures with several different energy companies to build new nuclear reactors. It had previously entertained discussions with European energy giants RWE, Iberdrola and Vattenfall.

EDF also has other options for developing nuclear facilities in the UK, having bought land adjacent to two existing nuclear plants. But British Energy's eight sites are considered prime locations for the government's proposed new generation of nuclear power plants.

IC VIEW

FairlyPriced

Given the government's involvement, it is tempting to predict that the collapse of talks won't signal the end of a deal with EDF, and the possibility of sweeteners or more attractive CVRs being placed on the table for shareholders could yet be introduced. But keeping all sides happy is set to be a drawn-out process, so for now, shares remain fairly priced at 696p.

LAST IC VIEW: Fairly priced (726p, 28 May 2008)

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