Grid and Lattice in £15bn merger

NATIONAL Grid is to merge with Lattice to create a £15bn electricity and gas utility that will be the largest in Britain and the sixth largest in the world.

The deal, unveiled when the stock market opened today, will give National Grid shareholders 57% of the new company, to be called National Grid Transco. This is in line with market valuations of the two companies in recent weeks.

Lattice chairman John Parker becomes chairman of the new group, and National Grid's Roger Urwin becomes chief executive. Current National Grid chairman James Ross, formerly of Littlewoods and Cable & Wireless, becomes deputy chairman. Lattice chief executive Colin Matthews is also staying on.

Opposition to the deal is likely to be muted because there is already a strong tranche of common ownership of the companies, both of which started off as privatisations - Lattice as part of British Gas in 1986 and National Grid as part of the electricity sales programme in the early 1990s. Some 40% of National Grid is owned by people who own Lattice and 34% of Lattice is owned by people who also own Grid.

There will be relatively small cost savings in the UK as a result of the deal, which should save about £100m in the first year, but this is not the business rationale for the merger. Instead it is justified on the grounds that it will bulk up the group and make it easier for the combined company to expand overseas, particularly in North America where the utility markets are liberalising, and because regulatory agreements run for 20 years, there is much more certainty about returns.

National Grid already has a substantial business in America but the acquisitions have left it so highly geared that any further large bid would put it at odds with the debt-to-equity limits set by the Securities and Exchange Commission.

The merger with Lattice overcomes this and gives headroom for more large US deals. Lattice lacked the scale to diversify overseas without incurring unacceptable risk. As part of the larger group, this problem is solved and it has the further opportunity to sell off regulated assets in Britain and redeploy the capital to lessheavilyregulated markets. The British regulator Ofgem has indicated unofficially that it does not object in principle to the deal.