Jeremy Warner's Outlook: Another British utility looks like falling to the power of leverage. Is this entirely safe?

Will the last British utility left in public ownership please turn out the lights? News that ScottishPower has received a bid approach continues the trend of British utility assets being bought up by largely foreign or private- equity interests.

There was no official confirmation last night of the bidder's identity, but the name on everybody's lips was Iberdrola, the Spanish energy company. Any such offer would almost certainly be in partnership with others, including Middle Eastern money, making it similar to Ferrovial's recent takeover of BAA, the British airports operator.

That's not to say that the list of other trade buyers being touted in the City yesterday - from RWE and E.ON of Germany to the Swedish state-owned energy company Vattenfall, and even the Italian power utility Enel - should be ruled out. They are all bound to be interested and may yet enter the fray.

Yet most of them already have their hands full with other things and even RWE, newly flush with cash from the sale of Thames Water, is likely to baulk at the price. Philip Bowman, the chief executive, is asking for bids well north of £8 a share. That would also rule out Ian Marchant, chief executive of Scottish & Southern. He's long dreamed of creating a national champion by merging with ScottishPower. Even assuming he could ever have got the idea through regulators, it now looks as if he'll miss his chance. An all-paper merger, despite mouth-watering synergies, is unlikely to be any match in value terms for the cash offer envisaged.

Over the years, there have been some disastrous diversifications by ScottishPower, but the underlying Scottish utility business has always been a highly desirable asset. The previous chief executive, Ian Russell, eventually paid for his costly overseas adventures with his job. Before he went, however, he at least managed to get one thing right. He rejected a 570p a share bid from E.ON of Germany.

Given the valuations now being attached to European utility assets, that price now looks almost absurdly low. One of the reasons for the subsequent re-rating is the current craze for leverage - or effectively buying companies with their own money. It is almost certain that this latest offer will follow the pattern of being largely financed from debt.

What the regulator has to say about such a capital structure, given the substantial investment programme faced by ScottishPower in network renewal, is anyone's guess. It has always struck me as unsafe to gear up utility assets in this way, however robust the safeguards.

The way such investors make their return is by by turning off the investment taps until the debt has been paid off, leaving the assets a pale shadow of their former selves. Yet despite these concerns, past experience is that highly leveraged bidders generally gain acceptance. The way things are going, there will soon be no British utility assets left for ordinary investors to become shareholders in. Like nine pins, they are all falling to the power of leverage.

The LSE: worth a lot more than you think

Spurred on by bid interest, the London Stock Exchange has undergone the most phenomenal re-rating over the past two years. Is the £12.82 the shares closed at last night - nearly four times higher than they were when Deutsche Börse made an approach two years ago - as good as it gets, or is there yet more to come?

Half-year results released yesterday suggest powerfully that the game is far from over; any bidder is indeed going to have to pay more still to secure the LSE's hand. Underpinning the LSE's case is the argument that the present boom conditions in equity trading that are reflected in these results are more than just a cyclical phenomenon, destined to vanish as quickly as summer snow as soon as the markets turn down.

According to Chris Gibson-Smith, the chairman, the results rather "reflect a secular change in equities trading facilitated by the roll-out of new technology, rapid growth of algorithmic/ black box trading, direct market access by traditional fund managers and hedge funds, and derivative traders using our market for hedging purposes".

Phew! Loosely translated, what this gobbledygook appears to mean is that the LSE has entered a virtuous circle of growth that may be largely immune to the usual ups and downs of the stock market. Investors are simply trading much more actively than they used to. This is partly caused by the growth in hedge funds, which on the whole are not long-term holders of equities. Rather they trade in and out.

Traditional long-only fund managers have also become more active in their trading. What's more, many have found trading directly through the LSE's book a much more effective way of executing their business than using intermediaries.

The growth in equity derivatives, most of which need to be constantly hedged through the cash equity market, has also caused volumes to rise sharply. The LSE's chief executive, Clara Furse, sees no end in sight to the positive effects of these structural changes on her business. The LSE's success in attracting international listings further enhances this virtuous circle, enabling the exchange to sell more data, more terminals and drive yet higher volumes.

Remarkably, more money has been raised through the London Stock Exchange over the last six months than by the New York Stock Exchange and Nasdaq combined. Moreover, the LSE has attracted more international listings than all the other stock exchanges in America and the rest of Europe combined. There are few better illustrations of London's success as a financial centre than these statistics. Assuming London can maintain this lead, then there is every reason to suppose the LSE is worth more than the lofty levels the shares have already ascended to.

A number of alternative electronic trading systems are planned for the London market, such as Project Boat, the platform being worked on by the big investment banks. But this is not where the main threat to the LSE's position lies. Rather, it is in the possibility that America finally gets its act together, and reinvigorates its capital markets.

What happens, for instance, if Sarbanes-Oxley is repealed and the regulatory environment in America is once again made conducive to international capital? Unfortunately for the US, it may not be as simple as just removing Sarbox, for the problem is also one of American foreign policy. The petrodollars that once flowed freely down the streets of New York now rain down on London. Even a change of President is unlikely rapidly to reverse this trend. In more ways than one, America is going to take many years to recover from the disaster of Iraq. In any case, it is no longer entirely trusted by international capital.

New York's loss has been London's gain, which is one of the reasons why both the New York Stock Exchange and Nasdaq are so keen to buy into Europe. We've heard nothing from Nasdaq, which is sitting on a 25.3 per cent stake in the LSE, in recent months, but it may have to move with urgency if it is to snatch the prize. A number of other parties are talking to Ms Furse about collaborative arrangements and even taking share stakes in the LSE. Everyone, it seems, wants a part of London's action.

Sir Clive Thomson: trashing a reputation

Sir Clive Thomson, former chairman of Rentokil, used to be known as Mr 20 per cent on account of his promise, eventually broken, to grow earnings by a fifth a year. Now he's been branded a 21st Century Sheriff of Nottingham for presiding over the collapse of the Christmas hamper company Farepak. He was chairman of Farepak's parent, European Home Retail, when it went under. This strikes as a not entirely appropriate description either, for it seems he didn't know savers' money was being used to finance other parts of the business. His role is perhaps best depicted by Tiny Rowland's dismissive description of non-executive directors as "just decorations on a Christmas tree". Other than adding lustre to a fundamentally rotten company, it is hard to see what other purpose he served there.

j.warner@independent.co.uk