Grid plans demerger and share buy-back

by Mark Milner

National Grid said yesterday that it planned to demerge its wireless infrastructure business and return £1bn to shareholders through a share buy-back programme.
The company, which reported a 12% rise in first-half pre-tax profits to £872m, said it was also planning to sell the Basslink interconnector business in Australia as it aims to focus on the gas and electricity transmission and distribution businesses in Britain and the US.

Estimates of the value of the wireless business, which made £42m in the first half of the year, vary from £1.5bn to £3bn. Chief executive designate Steve Holliday said the wireless business was producing double-digit growth but was always going to remain "a pretty small part of National Grid". A demerger would ensure shareholders continued to benefit from its growth as an independent entity.

Though demerging the business and listing the shares on the London market is the company's preferred option, Mr Holliday did not rule out a trade sale. "If someone comes along with an offer we will look at it."
The £1bn share buy-back will be funded from the revenues from so-called "stranded assets" in the US - where companies are allowed to recover the economic value of assets built at the insistence of regulators. National Grid, which operates much of Britain's gas and electricity transmission system, argues that because the income from the stranded assets will cease in 2011, it should not be counted towards its dividend policy but should be given back to shareholders as it arises.

Yesterday's results and the news of the demerger were well received in the City with National Grid's shares up 47.5p to 746.5p, making it the leading climber in the FTSE 100 index.

"All the UK utilities are at the high end, or even above, fair values," according to WestLB's analyst Peter Wirtz. "So to justify even higher prices the dividend growth story has to get better, and with this announcement National Grid has probably been able to raise prices further."

The sale of Basslink and the demerger of the wireless operations, coupled with the acquisition of the $11.8bn (£6.2bn) Keyspan energy distribution business in the US, which is expected to be completed next summer, will leave National Grid with its business split half and half between Britain and the US.

Mr Holliday said yesterday that National Grid planned to invest £9bn in its British businesses over the next five years. In the United States, where Keyspan will make it a leading player in the north-eastern energy market, National Grid is planning to spend about £2bn over the same period.

"We are in great shape," Mr Holliday said. "We have major opportunities to invest in the business going forward as we restructure and step up the pace of execution as to how we run the business."

National Grid is waiting for Ofgem to publish its final proposals on the price controls for the British gas and electricity business. Mr Holliday said more progress would be needed to produce what the company would regard as an acceptable outcome.

Source: The Guardian