EDF Buys British Energy to Expand in Nuclear Power

By Tara Patel and Paul Dobson

Sept. 24 (Bloomberg) -- Electricite de France SA, the world's largest operator of nuclear reactors, agreed to buy British Energy Group Plc for 12.5 billion pounds ($23 billion) after raising its offer for the U.K. power producer.

EDF will pay 774 pence a share for the East Kilbride, Scotland-based utility, according to a statement today. That's 35 percent above the stock's closing price on March 14, the last trading session before British Energy said it may receive an offer. Centrica Plc, the U.K.'s biggest energy supplier, is in talks to take a 25 percent stake in the acquired company.

The French utility will gain control of eight British nuclear plant sites where it plans to build four new reactors. The purchase by EDF, whose 58 nuclear units produced 77 percent of France's electricity last year -- the highest in the world -- comes as Britain's Prime Minister Gordon Brown seeks investment in atomic energy.

``It kickstarts the government's drive to facilitate new nuclear build,'' Tina Cook, an analyst at Charles Stanley & Co. in London, said today by phone. ``British Energy's existing assets are aging. EDF will contribute its expertise, as well as replacing those assets.''

British Energy, the country's largest power producer, jumped as much as 6.6 percent in London and traded at 769 pence as of 8:15 a.m. local time. Centrica increased 3.6 percent to 338.25 pence. EDF rose 4.8 percent to 52.54 euros in Paris. British Energy is 36 percent owned by the U.K. government while EDF is 85 percent state-owned.

Shield Customers

Centrica will also pay 774 pence a share for its stake, according to the statement. Its Chief Executive Officer Sam Laidlaw is seeking assets to reduce the company's exposure to energy market fluctuations and shield customers from price swings. EDF has 5 million customers in the U.K. where it owns gas- and coal-fired plants.

The offer to British Energy shareholders includes an alternative to an all-cash offer, in the form of 700 pence plus Contingent Value Rights, or CVRs, which give shareholders a slice of profits from the existing stations for the next ten years.

British Energy rejected an approach on July 31 from EDF at 765 pence a share, because its biggest private shareholders said the bid undervalued its nuclear stations and adjacent land. Invesco Ltd., the company's biggest private shareholder, will accept the EDF offer and take CVRs, the French utility said.

British Energy Chief Financial Officer Stephen Billingham said the majority of shareholders will support the deal even though one is opposed to it.

Constellation Offer

Together with U.S. buyout firms KKR & Co. and TPG Capital, EDF last week offered $6.2 billion for Constellation Energy Group Inc., 32 percent more than a rival bid by Warren Buffett. Constellation Chief Executive Officer Mayo Shattuck said Sept. 22 that the $4.7 billion approach by Buffett's MidAmerican Energy Holdings Co. was ``superior'' to any alternative.

Gordon Brown supports the expansion of nuclear power to replace older plants and cut carbon-dioxide emissions, and the sale of British Energy to EDF to accomplish that goal.

British Energy's land is attractive to EDF, which has plans for at least four new U.K. reactors from 2017. EDF wants to operate 10 plants of a new design, the European Pressurized Reactor, or EPR, in the U.S., China, U.K. and South Africa by 2020, Chairman Pierre Gadonneix said in May.

Reactor Costs

Each EPR will cost about 4.5 billion euros, Patrice Lambert-de Diesbach, an analyst at CM-CIC Markets, wrote in a report Sept. 15. That's higher than the 3.3 billion-euro price tag EDF has put on its Flamanville reactor in Normandy, which will be the country's first EPR.

British Energy, led by Chief Executive Officer Bill Coley, has sought to improve the reliability of its nuclear power stations and to secure extensions for their operating lives.

The U.K. utility posted a 65 percent drop in first-quarter profit to 62 million pounds on lower output. Its reactors produced 27 percent less power than a year earlier because of closures following the discovery of corroded wires.

The country's Nuclear Decommissioning Authority, an agency that cleans up older plants, said Sept. 10 it would auction three pieces of land. EDF already bought property adjacent to sites owned by both British Energy and the authority. E.ON AG, Germany's biggest utility, has a grid agreement for a new plant at one site starting in 2020.

The U.K. government acquired a stake in British Energy after rescuing it from collapse in 2004. At the time of its bailout of British Energy, the state took responsibility for the cost of closing the company's plants and cleaning up the sites. It created a Nuclear Liabilities Fund to pay for decommissioning costs, which would receive cash flow equivalent to the size of the state's holding in the company.

To contact the reporters on this story: Tara Patel in Paris tpatel2@bloomberg.net; Paul Dobson in London at pdobson2@bloomberg.net