Business Context and Reporting Period
Company: National Grid Group plc (in conjunction with Lattice Group plc)
Date: April 22, 2002
Event: Announcement of a recommended "merger of equals" between National Grid and Lattice to form National Grid Transco. The transaction is structured as a scheme of arrangement under UK law.
Strategic Rationale: To create a leading international energy delivery company combining National Grid's electricity transmission (UK/US) and Lattice's gas transportation (UK) assets. The merger aims to leverage complementary skills, share best practices, and expand growth opportunities in liberalizing energy markets.
Key Financial Metrics and Transaction Terms
- Combined Market Capitalization: Approximately £14.8 billion (based on closing prices as of April 19, 2002).
- Exchange Ratio: Lattice shareholders will receive 0.375 new National Grid Transco shares for each Lattice share held.
- Post-Merger Ownership: National Grid shareholders will hold approximately 57.3%; Lattice shareholders will hold approximately 42.7%.
- Expected Synergies: Pre-tax financial benefits expected to reach an annualized rate of at least £100 million by the end of the first full financial year following completion.
- Cost Savings Target: National Grid increased its UK controllable cost reduction target from 20% to 30%, delivering an additional £80 million in savings over the current price review period.
- Dividends:
- National Grid Final Dividend: 9.58 pence per share (payable August 15, 2002), bringing the full year total to 16.04 pence.
- Lattice Interim Dividend: 5.4 pence per share (payable June 14, 2002).
- Policy: The merged group intends to increase dividends per share by 5% in real terms annually through March 2006.
- Credit Rating: The merged group seeks to maintain a single A credit rating.
Material Changes and Historical Data
The filing provides summary financial data for the prior fiscal years to establish a baseline, noting that National Grid recently acquired Niagara Mohawk (Jan 2002), which is not fully reflected in the 2001 historical data provided.
| Metric | National Grid 2001 | National Grid 2000 | Lattice 2001 (Unaudited) | Lattice 2000 |
|---|---|---|---|---|
| Group Turnover (£m) | 3,799.7 | 1,614.7 | 3,293.0 | 3,087.0 |
| Total Operating Profit (£m) | 731.9 | 546.5 | 1,206.0 | 1,178.0 |
| Total Assets (£m) | 9,982.6 | 8,766.8 | 9,220.0 | 8,439.0 |
| Equity Shareholders' Funds (£m) | 3,475.8 | 2,909.0 | (723.0) | (1,012.0) |
Note: Lattice equity funds are negative due to the accounting treatment of the National Transmission System (NTS) restructuring. National Grid figures are before exceptional items and goodwill amortization.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Earnings Per Share (EPS): The merger is expected to be EPS enhancing (pre-exceptional items) in the first full financial year post-completion. However, management explicitly states this does not guarantee EPS will exceed historic levels of either predecessor company.
- Growth Strategy: Focus on expanding US operations (leveraging National Grid's track record) and exploiting opportunities in liberalizing European markets.
- Completion Timeline: Expected to complete in Autumn 2002, subject to conditions.
Conditions and Risks
- Regulatory Approvals: The merger is conditional on approvals from the UK Secretary of State, Ofgem, the US SEC (under PUHCA), the European Commission, and the US Hart-Scott-Rodino Act.
- Shareholder Approval: Requires special resolutions from Lattice shareholders and ordinary resolutions from National Grid shareholders.
- Inducement Fee: A £60 million fee is payable by either party if the merger fails due to a third-party offer, withdrawal of recommendation, or failure to satisfy conditions (excluding regulatory rejections).
- Forward-Looking Statements: Actual results may differ due to market conditions, currency fluctuations, integration challenges, and regulatory actions.
Investor Verification Checklist
- Verify the receipt of all necessary regulatory consents, specifically from the US SEC and UK Competition Commission, as these are critical conditions precedent.
- Confirm the outcome of the shareholder votes at the Extraordinary General Meetings scheduled for July 2002.
- Monitor the integration progress to ensure the projected £100 million in annualized pre-tax synergies are realized.
- Review the final audited accounts of the merged entity to assess the impact of the Niagara Mohawk acquisition on the consolidated balance sheet.
- Track the execution of the dividend policy to ensure the targeted 5% real annual increase is maintained.