Sweb's capitulation stokes the uncertainty

COMMENT

Uncertainty was written all over the electricity sector yesterday. Sweb's capitulation before the 965p-a-share bid from Southern Electric International of the US has set a benchmark value amidst the flurry of takeover activity. But shares across the sector lifted their heads rather nervously in response to the news, as investors wait to see which way the Department of Trade and Industry will jump on the matter of referral.

Given the absence of friends prepared to come to Sweb's rescue, the American usurper's price looks reasonably generous. SEI's UK namesake, Southern Electric, was rumoured to have offered Sweb a fair bit more during its ephemeral appearance as a white knight. But it then rode away rather smartly. The three bids now on the electricity sector board show a remarkable degree of convergence. Taking in the tax advantages many investors will get, the effective value of the offer for Sweb amounts to 981p. Hanson's agreed offer for Eastern Electric is pitched at 975p, while Scottish Power's hostile bid for Manweb, measured by the cash and shares option, is currently valued at 976p.

But the light shed by the settling of the offer prices into a relatively narrow corridor has not spread much clarity elsewhere. The relative reserve demonstrated by electricity share prices yesterday amounted to a plea for guidance on several fronts from a sector raring to move up another gear into acquisition overdrive. This makes it harder for the DTI to get away with just shrugging its shoulders over referral to the MMC. On paper, there is little to object to in SEI's takeover of Sweb. As an outsider moving in, it amounts to no more than a change of ownership. Hanson already has precedent in its favour. Having given the nod to Trafalgar House's abortive bid for Northern Electric, it will be harder for the DTI, even under the new stewardship of Ian Lang, to put up its hand to Hanson. But matters become cloudy once Scottish Power's bid for Manweb is entered into the equation. Stephen Littlechild, the regulator, wants it referred to the MMC to clarify the takeover rules for the other runners and riders in the sector waiting to emerge. The view prevails that if the DTI feels obliged to refer one, it will opt to refer them all. But Scottish Power's bid to extend its dominion within the electricity sector raises more than straightforward takeover questions. The matter of vertical integration between generators and distributors in England and Wales, which were separated at the time of privatisation, will need to be clarified sooner or later. If Scottish Power can buy a distribution company, why not National Power and PowerGen?

Pressure is building up within companies to evolve from being mere cash- rich distributors of electricity into becoming integrated energy retailers, offering gas and electricity, and owning power stations. British Gas has already applied for a licence to supply electricity in 1998. It may well be the case that privately the Government is prepared to let market shake- out decide the shape of tomorrow's electricity sector. But some guidance now would not go amiss.

Time for building societies to talk money

With the glint of steel now clearly visible in the distance, it is no surprise that many building societies are casting round for ways to avoid the takeover axe. Some of the big names have no doubt already privately decided that conversion to plc status is inevitable. But there are others, like Bradford & Bingley, which seem determined to fight for their mutual status. Loyalty bonuses for building society customers have been gently mooted for some time. But only now has the seriousness of the societies' predicament made them attractive

No doubt others will follow B&B's bonus scheme gambit. It has been painted as just another way of absorbing excess capital, akin to Barclays' recent share buy-back. But this is disingenuous. Ever since Abbey National succeeded in winning over National & Provincial members with a cash-in-hand pledge, building societies know they have to do more than just polish their nicer- than-the-banks image. They have to talk money.

Spurred on by the regulators, keen to see the virtues of mutuality brought home to the public, the B&B is proposing that borrowers who have held a pounds 60,000 mortgage for five years or more could expect a bonus of around pounds 800 every five years. Savers with more than pounds 10,000 invested could expect a similar amount if they have held the account for 10 years or more.

The key question is whether customers will be prepared to resist tempting pay-outs today offered by bank predators, and instead wait patiently for loyalty bonuses over the horizon. Experience suggests this to be unlikely. Could the bonus scheme, however, be developed into a "poison pill" strategy to deter unwanted bankers? Building societies are calculating whether they could give away enough capital in the form of payouts, and then load the balance sheet with debt through the bond market to make a predator think thrice. But this may not work either. Banks want to buy mortgage assets and customer bases, and care less about the remainder of the balance sheet. It looks as though building societies may be trying it on too late.

A low interest rate era in prospect

Low inflation has not commanded the support in Britain that it does in Germany. We have not lived through two hyper-inflations that decimated savings. Our folk-memories are of Jarrow marches rather than wheelbarrows of worthless paper money.

But low interest rates: that's an altogether different proposition. Burnt by the experience of double-digit interest rates in the 1980s and early 1990s, few people are ready to believe in an era of low interest rates. Yet this may be the prospect in store.

The turnaround in interest rate expectations this year has startled even the City professionals who are supposed to be the masters of this guessing game. At the beginning of 1995, the City anticipated interest rates of 9 per cent by the end of the year.

Now the current level of 6.75 per cent is increasingly looking like the peak. The Bank of England is apparently preparing the ground for a retreat from its demand for another increase, while Kenneth Clarke has won his gamble to resist Eddie George's demand for higher rates. There are, of course, still voices calling for an increase, but as the new, more optimistic consensus on interest rates filters through to the public, it is bound to have a positive effect on the economy.

The housing market, where fears of a repetition of the doubling in rates at the end of the 1980s are still acute, should be a particular beneficiary.

Such a fillip is just what the doctor ordered given concerns about a gathering economic slowdown. But in the longer term, there may be a more significant dividend. If people make an equation between low interest rates and low inflation, then the transition to a low-inflation economy will be made a lot easier.