EDF May Overpay for British Energy by Raising Offer

By Paul Dobson
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Sept. 17 (Bloomberg) -- Electricite de France SA, the world's biggest operator of atomic-power plants, may pay too much for British Energy Group Plc by raising its 12 billion-pound ($21.4 billion) offer.

British Energy, the U.K.'s biggest power producer, is worth no more than 777 pence a share in a takeover, 1.6 percent above the 765-pence offer level, because the French company may face delays in building new plants needed to make the purchase profitable, says Ingo Becker, an analyst at Landsbanki Kepler. Morgan Stanley analyst Bobby Chada values the shares at 665 pence, including 50 pence for new plants.

``Soaring build costs and potential shortages in both equipment and engineers'' would make a higher bid risky, according to Becker, who is based in Frankfurt and has a ``reduce'' recommendation on British Energy. An acquirer ``would not be willing to pay up significantly for optional site value,'' he said in a Sept. 10 investor note.

The biggest risk to British Energy shareholders may be that EDF, whose board meets today, abandons its offer after failing with its July 31 approach. The East Kilbride, Scotland-based company has traded within 9 percent of EDF's offer since Aug. 1, indicating the market is still betting on a deal. EDF has dropped 13 percent since then while energy prices slumped and equities fell. British Energy traded at 724 pence on the London Stock Exchange at 12.24 p.m. today while EDF was at 48.05 euros on Euronext in Paris.

Reactor Sites

The U.K. utility's biggest private shareholders said the bid undervalued its eight nuclear stations and adjacent land where more reactors may be built. Becker said any revised bid for the company, which is 36 percent state-owned, is unlikely to exceed 800 pence.

British Energy's land is attractive to Paris-based EDF, which has plans for at least four new U.K. reactors from 2017. Prime Minister 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.

Analysts can't agree on valuation because utilities usually face opposition to nuclear plants from environmentalists and local residents, and planning and construction may take 10 years or more. Deutsche Bank AG analyst Iain Turner says new nuclear may add up to 200 pence to his 775-pence valuation.

Investor Opposition

The sites' ``strategic value is immense and difficult to quantify, but that's what the debate is about,'' said Edward Collins, a London-based fund manager at New Star Asset Management Group Plc who helps manages about $41 billion, including British Energy shares. Evolution Securities Ltd. analyst Lakis Athanasiou says that potential may be worth 160 pence per share.

EDF, which is 85 percent owned by the French government, backed away from a takeover bid because British Energy shareholders, including Invesco Ltd. and M&G Investment Management Ltd., opposed the approach. The French company will need to raise its bid or find a way for investors to profit from new nuclear developments for the deal to succeed, according to Collins.

Kaa Holmes, a spokesman for EDF's U.K. unit, declined to comment on any takeover discussions. The Times said yesterday that EDF may consider offering about 775 pence a share in cash, and boost a possible alternative payout from contingent value rights, which are financial instruments designed to give shareholders a slice of future profits.

'Major Role'

EDF is ``clearly committed to play a major role in nuclear development in Great Britain,'' Chief Executive Officer Pierre Gadonneix told reporters in London yesterday, adding the company wouldn't do a deal ``at any price.'' EDF has a scheduled board meeting today, spokesman Francois Molho said, declining to give details of the agenda.

Athanasiou says new nuclear plants may be worth as much as 245 pence to British Energy, an estimate he lowers by 35 percent to take account of risks. The figures are based on likely costs for Teollisuuden Voima Oyj's 1,600-megawatt Olkiluoto-3 station, being built in Finland.

Athanasiou puts the costs of building the Finnish plant at 5 billion euros ($7 billion), and assumes British Energy's sites will have six new reactors, one completed every 18 months starting in 2019. Running the plants for 85 percent of the time over 50 years, with power prices at 54 pounds a megawatt hour, would produce the profits he forecasts. Sizewell-B, the country's last nuclear plant, was completed on England's east coast in 1995 after taking six years to obtain planning consent.

Site Potential

``All of our sites have the potential for new nuclear plants,'' British Energy spokeswoman Sue Fletcher said Sept. 11. She declined to comment on the takeover speculation.

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 2020.

To contact the reporter on this story: Paul Dobson in London at pdobson2@bloomberg.net