Comment: Evisceration as a form of defence

Evisceration as a form of defence

Meanwhile, in another part of the forest, Scottish Power's bid for Manweb is being fought out on its merits - Ian Lang having already decided against reference in this case. The central plank of Manweb's defence is a direct copy of Northern Electric's defence against Trafalgar House. The idea is to gouge out every lump of cash it can find and hand it back to shareholders. Singing somebody else's song might be the only option in such circumstances, but it left the City decidedly underwelmed.

For many there is something distasteful about a company eviscerating itself as a defence against a takeover bid. Nothing is quite normal when it comes to the privatised utilities, however, and the simple truth is that this is the only viable defence that can be mounted.

In theory, Manweb shareholders need not lose too much sleep when presented with a choice like this. If they accept the bid, they take the money and run. If they accept the management's scorched earth defence, they have cash in hand and the highly geared rump company of the old utility. Deciding which route to take ought to be a question of simple arithmetic.

In fact, the decision is not quite as easy as that. The rump company left behind may look like the old one and its worth is usually calculated on the same basis. But its management will be under heavy pressure to perform as a result of taking on much higher levels of debt.

That ought to be a good thing, but in the world of regional electricity companies it is just as likely to be the reverse. Replacing equity with debt in this way would challenge even the most entrepreneurial cost-cutting managements.

The ability of RECs to deliver on such demanding programmes must at least be questionable. The pressures are just as likely to lead to desperate measures that don't work. Shares in the indebted rump are certain to be more volatile, its credit rating lower and its resistance to unexpected shocks diminished, as a direct result of the higher debt load.

Most of the calculations used to demonstrate the value of a rump company deliberately ignore the fact that these are not the same animals as the old RECs. But even valuing the rump on the old basis, it is hard to make the Manweb defence add up to as much as the value of the Scottish Power bid. Even where the bid and the defence package are roughly comparable in value, it is probably safer to accept the bid.

For while it is true that bidders load up their new subsidiaries with debt too, the exercise is a safer one. For example, Southern Company is paying for much of the cost of its purchase of the South Western Electricity Board by jacking up its new UK subsidiary's borrowings.

Undoubtedly, SWEB will be driven harder as a result of this strategy. But it will have a substantial parent company, and that is not as risky as being left all alone to struggle with a mountain of debt. In the absence of a rival bid, Scottish seems likely to succeed in its bid for Manweb.