The UK power grid company National Grid Group and the gas transmission company Lattice are merging to create National Grid Transco, to be owned 57.3 per cent by National Grid shareholders and 42.7 per cent by Lattice shareholders. The £14.8 billion deal will create the UK’s largest energy utility. Although it is being billed as a merger of equals, the mechanism involves the National Grid Group acquiring Lattice for around $8.5 billion in stock. The company will also assume a Lattice debt of around $10 billion. The merger, which the two companies hope will be completed by the autumn, is aimed at improving performance and driving down costs.

National Grid owns power and telecommunications networks in both the UK and the USA. Lattice, which was formerly part of British Gas, now runs Transco and maintains the gas pipeline network in the UK. The companies expect to see some staff reductions as a result of the merger. Savings of £100 million across the two companies are being predicted, mainly from the disposal of a London HQ, and few redundancies are expected as Transco cut 2 400 jobs prior to the announcement. Even so, it is expected that a good deal of the saving will be clawed back by regulators at the next price review.

The contract requires regulatory approval in both the UK and the USA but once the merger is completed the group is expected to mount an aggressive acquisition campaign in the US.With an annual operating cash flow of £3.5 billion ($5 billion) and a combined market value of almost £15 billion ($21 billion), the company hopes it will have enough weight to move into the liberalised power markets of the northeast US, where NGC has already invested some £9 billion ($13 billion). In addition, NGC is set to take over operation of the Alliance RTO to manage the electricity transmission systems of 10 companies in 11 states: Indiana, Illinois, Kentucky, Michigan, Missouri, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, and West Virginia.

Analysts have already compiled a hit list of potential targets, namely Energy East of Albany, Northeast Utilities of Hartford and NSTAR of Boston. Expansion into continental Europe is also possible, although the European markets are seen as a tough nut to crack with many countries reluctant to relinquish control of transmission networks to independent operators, a move which the UK made early on in its deregulation programme. National Grid chief executive Roger Urwin will become group chief executive, while Lattice chairman Sir John Parker will be chairman of the combined group.

The placing of regulatory impediments to the alliance is thought to be unlikely. The Office of Fair Trading and industry watchdog Ofgem say that they have no reservations concerning the merger ‘in principle’. And the European Commission does not need to be consulted as the two do not have substantial sales elsewhere in Europe. However, the Association of Electricity Producers, representing power station owners, and consumer group Energywatch have expressed their concerns over the size of the merged group. As well as being the largest utility in the UK, it will rank sixth in the world and second in the USA.