Venture into Centrica's shares

Ever since Centrica launched a dawn raid on shares in North Sea oil and gas producer in March, buying in at 725p, share tipsters have focused on the quick profits that would materialise if Centrica made a full bid.

That's now official. Venture's share price is now 832p, and there is little upside compared with Centrica's final offer of 845p. But shares in Centrica, which have come off the boil since May's year-high of 250p, remain an interesting prospect.

As the owner of British Gas, Centrica is the UK's largest domestic energy supplier with 15.6m customers - the epitome of the defensive utility. However, the fact that Centrica generates so little of the energy it supplies leaves it exposed to volatility in the wholesale price of energy - a problem its bosses would dearly love to resolve.

One step towards this was November's . This raised £2.2bn, which the company promised to target at "transformational acquisitions" to add the much-needed generating capacity. But City analysts are blowing hot and cold on whether Centrica is spending its money wisely.

At the time of its rights issue, Centrica was on course to take a 25 per cent stake in nuclear power generator from the French utilities giant, EDF, which led a 774p-a-share takeover last autumn. By May, when Centrica was due to seal the deal, UK forward power prices had fallen 37 per cent due to the collapsing oil price and this put pressure on Centrica to reduce its offer.

Centrica finally paid £2.3bn for a 20 per cent stake in British Energy and conserved its cash by paying for part of it with its (generously valued) 51 per cent holding in Belgian energy provider SPE, effectively buying into British Energy at 622p a share. It also has the right to participate in a 20 per cent interest in any nuclear power stations that EDF builds in the UK.

Even so, Peter Atherton, analyst at Citi's investment banking arm, calculates that, on the basis of an implied cost per barrel of oil, the British Energy deal works out at $17.43 per barrel, compared with $9.43 on the Venture deal. So, if the Venture deal completes, it looks to be such good value that analysts may stop quibbling over whether Centrica overpaid for British Energy.

Having amassed just under 30 per cent of Venture's shares, Centrica tabled a cash offer earlier this month, valuing the company's equity at £1.3bn. This bid is final unless a rival bidder emerges, which looks unlikely.

"Given this strong starting position, we now see the deal concluding relatively rapidly," says Angelos Anastasiou, analyst at stockbroker Pali International. Nevertheless, two leading shareholders have rejected the bid, and Venture's chief executive says an offer of 900p-1,000p would be more appropriate.

Considering that Venture's shares were trading at just 450p before the bid speculation, Mr Anastasiou believes Centrica can argue that its offer is competitive. Centrica also shares several major shareholders with Venture - Legal & General, Axa and JP Morgan - who between them control 11 per cent of Venture's shares.

Given that Venture's reserves are weighted to gas, rather than oil, the recent fall in wholesale gas prices also has a bearing. Known as the 'gas glut', increased gas production from emerging economies has lead to a slump in wholesale gas prices. Tina Cook, utilities analyst with broker Charles Stanley, estimates that, since the start of the year, forward gas prices have fallen by more than 50 per cent in sterling terms while forward oil prices have risen about 16 per cent.

"Although uncertainties remain, the EDF and Venture deals could prove transformational in achieving Centrica's target hedge [against commodity price risk] of 60 per cent, which is a level on par with its peers," she says.