Consumers face long wait for a share in savings

PETER RODGERS

and MARY FAGAN

The City, not the consumer, would be given first call on the savings expected from job losses and rationalisation over the rest of the decade in North West Water's bid for Norweb .

This proposal is fundamental to the strategy devised by North West Water and its City advisers, Kleinwort Benson, to convince investors that the merger of two such different animals should be taken seriously. North West Water argued that if the City was to put up the cash to finance the takeover then it should have a prior claim on the benefits.

Brian Staples, chief executive, said: "It is shareholders who are putting up the cash, not customers, and shareholders first have to see a return. That is an equitable situation ... We have a good degree of confidence that we will get approval."

For the first five years, the money will go to shareholders as higher dividends, and only after 2000 will customers begin to see any effect on their bills, spread over five years.

North West Water believes that Ian Byatt, the water regulator, will agree. His office, Ofwat, has so far been guarded in its response but said that any suggestion that there has been a prior agreement would be "somewhat cheeky". But while the watchdog is due to publish a consultative document on the issue next week, there are hints already that immediate cuts for customers will not be put back on the agenda by the water regulator.

Ofwat takes the line that mergers between water companies are, in principle, against the public interest since it reduces the number of companies in the industry between which Mr Byatt can make comparisons of efficiency - the basis on which he sets price controls.

In the case of the proposed takeover of Northumbrian Water by Lyonnaise des Eaux of France, which already owns UK water firms, Mr Byatt is seeking cuts in charges of up to 20 per cent to offset the disadvantage of having fewer companies to compare.

But a spokeswoman for Ofwat said yesterday: "This [latest merger proposal] is not the same as a merger between water companies, and the same sort of savings might be difficult to achieve. We are far less likely to see immediate benefits for consumers - it would probably have to emerge over time."

Sir Desmond promised the companies would be kept as separate subsidiaries of a new umbrella group, to be called United Utilities. This will allow the electricity and water regulators to retain a firm grip on the businesses.

Sir Desmond said: "From the reponse of the regulators so far we foresee no significant impediment to this going ahead." Talks with Ofwat and with Offer, the electricity regulator, have lasted more than a month.

North West Water may find Ian Lang, President of the Board of Trade, more difficult to convince. With a cross- party political uproar breaking out over the bid and consumers worried that the merged organisation will have too much power to lean on customers unable to pay their bills, Mr Lang may be tempted to refer it all to the Monopolies and Mergers Commission.

It will be hard to use a reduction of competition as an excuse, because there is none between the two companies. But Mr Lang may well use his powers to call for an inquiry on public interest grounds or to investigate the complex regulatory problems such a novel combination could throw up.

The complaints from politicians, consumers and unions were not echoed in the City. The most convincing financial argument for the takeover put to investors was based on the savings expected from merging the corporate headquarters and combining services such as billing customers and organising maintenance and repairs into a single new unit, the Facilities Management Company.

This will initially employ 4,000 - before the planned job cuts - and use a pounds 235m information technology investment already made by North West Water to streamline its own procedures. Sir Desmond is so confident of the power of his new systems that he believes the company will be able to sell its services to third parties.

The financial engineers have found a series of other benefits that will appeal to professional investors. North West Water spends more than it receives because of the scale of its investment programme - which may even have to be stepped up to cope with the embarrassing effects of the drought, which led to a hosepipe ban in one of Britain's wettest areas. Norweb, in contrast, produces a surplus of cash that will offset this.

The taxpayer will be helping out in a big way, because the combined company will pay less tax through mopping up unused allowances. There will also be, the company claims, a "more efficient and cost effective" capital structure, a result of relying more heavily on borrowings from banks.

Add all these changes together and it should be easy to boost the dividend, which could be enough to swing the argument with shareholders.