City sceptical on North West's plans for taking over Norweb

MARY FAGAN

Industrial Correspondent

Takeover fever gripped the electricity industry as Norweb, the regional electricity company in the north-west of England, said that negotiations with North West Water might lead to a bid. Shares in the sector soared to a new high - despite City scepticism that a merger of the water and electricity companies would yield limited benefits and would face unprecendented hurdles from regulators.

Although there was much excitement over Norweb's statement, one analyst said: "It will be hard to sell this merger to the City. It is certainly not a foregone conclusion that it will go ahead."

The merger, which would result in a pounds 4bn utility, would be the first between a water and electricity firm and could be announced as early as today. North West Water declined to comment. "We are not giving out any information at all in respect of the merger," a spokeswoman said.

Norweb said it had been approached by several parties, including North West, "each of whom has expressed interest in making a offer for Norweb materially above" the previous day's closing share price of 917p. The company, whose shares jumped to 975p, advised shareholders to take no action until a further announcement could be made.

The news prompted sharp attacks from the Labour Party and consumer groups. There were widespread calls for a merger to be referred to the Monopolies and Mergers Commission and warnings from unions that many jobs might be lost.

The National Consumer Council said such a merger would take the "British utilities into uncharted waters. Consumers have no control over radical changes to companies providing them with essential services. They deserve to be told how they will be affected."

Ofwat, the water industry regulator, said it would look at any bid and would probably launch a consultation with the electricity watchdog, Offer.

The regulators would be particularly concerned about ring-fencing of the separate busin- esses and access to the individual accounts. A spokeswoman for Ofwat said: "We would look at the reactions to the consultation, consider the issues raised and then think about any advice to be given to the Office of Fair Trading."

The view is that any merger between the two utilities would take the form of a takeover of Norweb by North West to attempt to diffuse some of the regulatory problems. In previous bid attempts for water companies, Ofwat has exacted a high price in terms of price cuts for consumers. In the case of the present potential bid for Northumbrian Water by Lyonnaise des Eaux of France, Ofwat wants price cuts of up to 20 per cent before any bid can proceed.

A fresh bid in the electricity sector has been keenly awaited since last Thursday when Ian Lang, President of the Board of Trade, gave clearance to three existing takeover proposals for South Western Electricity, Eastern Electricity and Manweb.

The decision not to refer any of the three to the Monopolies and Mergers Commission was seen as the green light for a free-for-all in the regional electricity sector. It had been expected that the pounds 1bn bid for Manweb by Scottish Power - the first within the industry - would be referred to the MMC. Manweb yesterday renewed its attack against the Scottish group's hostile bid, saying that Scottish Power's prospects were uncertain and that the offer seriously undervalued Manweb.

City analysts were yesterday speculating that the next electricity firm to become a bid target could be South Wales, which at one point after privatisation was being keenly eyed by Welsh Water. Shares in Swalec rose by 30p to 937p.

The Department of Trade and Industry said it could not comment on any plans by North West Water, saying: "We do not come into play until there is an actual bid." But Mr Lang has said that each takeover proposal will be dealt with on its own merits and that clearance of one bid does not mean that others would not be referred to the MMC.

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