Oil Energy Money

The government is set to sell its 35% stake in the UK’s largest electricity provider British Energy (BE).  This comes as big news because B6E controls eight of the UK’s nuclear power plants and holds the rights to sites for building future reactors. 

The possible bidders are France’s EDF, Spain’s Iberdrola, Germany’s Eon and RWE and British company Centrica.  EDF is the most suitable due to its experience running 80% of France’s nuclear power and already supplying 20% of Britain’s electricity.  Eon and RWE have the capacity and capital to buy the entire 35% stake, which could be worth over $3 billion.  National preference lies with Centrica, but the company is too small and inexperienced to run operations by itself.  Despite holding 10% of the British electricity market, Centrica only generates 5% of the nation’s electricity and depends on buying energy on the wholesale markets.

A joint offer thus seems the most likely, with EDF and RWE approaching Centrica to discuss a joint bid.  The government would also prefer this, encouraging different technology to build future plants and prevent a foreign company creating a monopoly on energy.

Many consider this nationalistic approach uncompetitive, but even the buyers would rather spread the risk with a partner in the takeover.  Reflecting its role as kingmaker, Centrica’s share price shot from 303p on the 6th to closing at 316.25p on the eigth.

Valuing British Energy is hotly debated.  Shares currently trade at 711p, their highest for 20 months, valuing the company at almost $7bn.  This could increase depending on the bids, which are expected to reach 900p.  However this would grossly overvalue the company, as it is already trading at 17.5 times next year’s earnings while the energy sector average is 13.1 times, according to analysts at Dresdner Kleinwort.  If there’s no bid within the month, expect share prices to fall back to 600p. 

With the rising cost of electricity linked to the cost of gas which in turn depends on the price of oil, British Energy should be a worthwhile investment given oil prices remain high.  To take advantage of current prices and expediate British nuclear generation, suitors should make their bids for British Energy as soon as possible.  OEM expects the government to favor a joint bid with Centrica and EDF, but a three way bid with RWE may be the best solution.