Where are the Bids?

As the market remains within spitting distance of its all-time record in December 1999 of 6,930, City experts are continually asking why there is so little corporate activity.

After all, despite the long economic down-turn, corporate balances are bulging, but – with a few exceptions – investment levels remain sluggish.

For the utilities sector, which in the late 1990s hummed with corporate activity, there are various explanations.

With a General Election now less than 18 months away, not forgetting the radical utility policies being peddled by the Labour Party, any bidder would probably face flak on several fronts.  

Within the privatised telecoms market, Vodafone recently undertook its record-breaking pay-out to shareholders following the sale of its 45% stake in Verizon’s mobile business.

Whilst it is now seeking to acquire cable companies, the rump of Vodafone is widely believed to be attractive for the behemoth that is ATT.

BT is less likely to be targeted although the market is eagerly awaiting the key EU ruling on the planned international tie-up between Telefonica’s German unit with that of the KPN-owned E-Plus. If the latter deal proceeds, widespread EU telecoms consolidation is anticipated.

On the water-front, the ongoing periodic review constitutes an extra risk for potential bidders. Now that Pennon has provisionally secured the coveted ‘fast-track’ status from Ofwat, it is now – due to reduced regulatory risk – more in play.  

Significantly, its shares have responded positively to Ofwat’s announcement, unlike those of Severn Trent, which famously turned down a £22 per share bid last summer: Severn Trent was not ‘fast-tracked’.

Once the water review is ‘done and dusted’, expect renewed take-over activity by private equity players.

As the major energy companies grapple with low generation returns and seemingly non-stop political meddling, it is fanciful to suggest that a swathe of bids will hit the sector.  

But, once the ongoing electricity distribution review is concluded, further private equity involvement may be attracted: the new eight-year duration period will be of particular interest to funds with a long-time horizon.

In terms of companies, National Grid seems too large to become a credible bid target, short of a complex break-up strategy.

Some years ago, SSE was widely considered to be an obvious target. More recently, it has attracted its fair share of tricky issues, the forthcoming Scottish referendum being amongst them: poor generation returns, renewable subsidy doubts and ongoing price reviews also raise its risk profile.

Drax Group could well come into play. However, its valuation is based primarily on its biomass strategy which is highly dependent on generous subsidies – these may be cut back by the EU authorities.            

Despite its problems, Centrica remains an unlikely bid target. Some years ago, there was a persuasive case for Gazprom to bid for it.

With the latter facing many production and financial challenges, this scenario is now highly unlikely, all the more so post Russia’s latest Crimean initiative.

Whilst there is no realistic prospect of the utility take-over fever of the mid-1990s being replicated, utilities’ share prices would undoubtedly respond positively if bidders returned.   

Nigel Hawkins (nigelhawkins1010@aol.com) is a Director of Nigel Hawkins Associates which undertakes investment and policy research