Investors who triggered a nuclear meltdown

The grand plan for nuclear power in the UK has come to a grinding halt with EDF's decision to abandon buying British Energy
Dominic O'Connell

It’s not often that the blocking of a single deal brings a whole area of national policy to a grinding halt.
Yet that is what has happened with the failed (for the moment) auction of British Energy (BE), our sole nuclear-power provider. When its sale to EDF, the French utility group, was halted on Thursday, government energy policy was derailed at the same moment.
Ministers, not least Gordon Brown, had set great store by the sale of BE to the French. It was a key part of a grand plan that would see a fleet of new nuclear stations built in Britain over the next 10 years, solving two of the government’s headaches at a stroke.
New nuclear power promises to bridge Britain’s energy gap, a shortage of electricity caused by the retirement of coal-fired stations in the middle years of the next decade. It also holds out the hope of Britain meeting its ambitious greenhouse-gas reduction targets. The pro-nuclear arguments have been swallowed hook, line and sinker by the government, which is desperate to find answers to these problems.
The marriage of the French and BE appeared to be the best way of bringing this brave new world of nuclear power quickly to reality. Each had something the other needed. BE had the sites for the new stations — essentially the same sites occupied by the existing stations — and the French had the know-how. Approved commercial-reactor designs are thin on the ground globally, and EDF, via the French power company Areva, has one ready to go. Ministers, who through their bail-out of BE in 2005 control a 35% stake in the company, were in an ideal position to bring the pair to the altar.
The government had even started planning for the next phase of the nuclear plan. Sites belonging to the Nuclear Decommissioning Authority, a government agency, were to be packaged up and sold to another consortium, which would have a different reactor design — probably one provided by Toshiba, the Japanese group.
The end result would have been a resurgent nuclear-power industry funded by international groups with deep pockets, and no reliance on one company — or one reactor design — in the future.
Unfortunately, it didn’t quite work out that way. Despite strenuous efforts, BE and its advisers never managed to get an auction going, with potential rivals to EDF, such as Germany’s RWE, falling by the wayside as the process went on. This left the French in a strong position. But shareholders were always likely to want to hold out for a better offer.
This is exactly what happened. Two leading shareholders in BE, the fund managers Invesco and M&G, do not think the price offered by the French — 765p a share, or 700p plus a share in future profits — is enough. They are also unconvinced about the structure of the deal, in particular the unusual security — a “contingent value right” — that had been devised to encapsulate the future profits. It was a bit too exotic for a mainline fund manager.
Invesco and M&G are smart investors, and they have every right to their opinion on the value of BE. I am also sure that the full story of how they came to turn down the offer has not yet come out. Were I in their shoes, though, I would take the money and run. High electricity prices mean BE is having a decent spell at the moment, but there is no guarantee that today’s price levels will persist.
More worrying for me is BE’s unhappy knack of finding problems in its current plants, in particular the AGR (advanced gas reactor) stations. There have been persistent niggles and shutdowns, to the extent that nuclear’s contribution to the nation’s power supply shrank to 15% last year, its lowest level since 1987. I would not want to bet that BE won’t find more problems with the AGRs in the future.
For the moment, however, there is no money to take. After meeting on Thursday night and contemplating Invesco and M&G’s position, BE’s directors felt it couldn’t recommend the EDF offer to shareholders.

It’s difficult to see how the circle can be squared. Unless, of course, the BE board reconvenes — after the summer holidays perhaps — and says that it will recommend the offer after all. It would be a ballsy thing to do, but it would bring matters to a head.