Nuclear dismemberment

Published: July 27 2008 18:15

Ministers like to fulminate about the UK’s “buy now, pay later” culture. But when it comes to the sale of the state’s own assets, the government seems quite happy to take an IOU. Shareholders in British Energy, the nuclear power group 35 per cent-controlled by the government, look likely this week to be offered a share of the company’s future profits in a plan that should clear the way for it to be carved up between France’s EDF and Centrica of the UK.
As a way of breaking a stalemate over price, solutions such as these can be pragmatic. Contingency terms function like a call option, allowing the buyer to commit some money up front and then wait and see what the outcome is. They also usually create incentives for managers to stay on and work hard after the acquisition.

But the usage in this case seems odd. “Earn-outs” are normally seen in creative and knowledge-intensive industries such as technology and pharmaceuticals, where there may be genuine differences of opinion over the value of the intellectual capital the seller is bringing to the table. Here, there are hard (albeit ageing) assets in the form of eight nuclear plants, sites for a lot more, and a tangible trading history. The only unknowable is the degree to which nuclear power will be used in the future, but this government – and its putative Conservative successor – has assured British Energy there are no plans to reverse a commitment to supporting new building on its sites.
If a structure emerges as reported, it will reflect a cash-strapped Treasury’s determination to keep buyers onside – at a time when it is openly pondering one-off windfall taxes for energy companies. Meanwhile, minority shareholders should be wary. As long as an earn-out lets a value discrepancy stand between buyer and seller, both sides are forestalling the inevitable. As with the consumer credit bubble, somebody will win eventually and somebody will lose.
Copyright The Financial Times Limited 2008