United's cut-price cash call shock

POWER and water giant United Utilities stunned the City today with plans for a massive, deeply discounted £1bn cash call. Shares in UU dropped 44p to 532p after the group unveiled the surprise rights issue - priced 43% below its closing price on Friday.

UU wants the cash to repair its balance sheet and finance its capital investment programme.

The cash call is by far the biggest in London this year, though it remains dwarfed by BT's £6.4bn capital raising in 2001 and Kingfisher's £2bn share issue last year.

UU chief executive John Roberts said: 'I don't think this should come as a shock to people. We've been signalling our substantial capital requirements for some time.'

UU is to offer five new shares for every nine held at a price of 330p. That compares with Friday's closing price of 576p.

The issue has been structured as a two-stage process, giving UU half the proceeds in September this year and the other half in June 2005. Roberts said the cash would sustain UU's credit rating, saving it millions in interest.

He attempted to reassure about the dividend, which has been a strong prop under the share price. Roberts was confident regulatory reviews would enable UU to pay out 'an acceptable allowed return' after 2005, but added that he could not give an absolute undertaking.

The issue is not underwritten, which has cut the cost to less than £10m. Underwriting would have added about another £15m. The main advisers are Dresdner Kleinwort Wasserstein-Deutsche Bank, Linklaters and Slaughter & May.

UU, which has debt of £3.4bn, supplies water to three million in the north west. It is also an electricity distributor with two million customers. The group expects capital spending of at least £3.5bn in the 2005-10 regulatory review period, in addition to £1.9bn earmarked for the next two years.

Shareholders will pay 165p in September and 165p in June 2005. Shareholders ducking tranche one will not qualify for tranche two. UU said trading was in line with expectations and it was confident about prospects this year.

Water regulator Ofwat said: 'We see virtue in shareholder equity as a cushion against external events and as a spur to greater efficiency.'