National Grid has agreed to sell a majority stake in its gas pipe network to a group of investors including Chinese and Qatari sovereign wealth funds in a deal valuing the business at about £13.8bn.
Prime Minister Teresa May has allowed a consortium of Chinese and Qatari sovereign wealth funds to buy a majority stake in National Grid for about £13.8bn. Despite the national security concerns expressed of British industry and infrastructure being sold to foreign owners, John Pettigrew, Chief Executive of National Grid, has advised this buyer already owns stakes in Heathrow, Thames Water and therefore there are ‘absolutely no concerns’. I have two points. Firstly, surely the fact that foreign investors are slowly but surely taking majority stakes should be a concern. Secondly, shareholders in National Grid will return £4bn to shareholders but the majority of such shareholders have invested to get a good yield and a passive income, rather than a capital gain. They are now faced with the question of where should they invest their new found gains to achieve comparable income.So why is National Grid trying to shrink its business? Apparently the reason has to do with the differential growth rates it expects from its gas and electricity networks. Gas consumption has fallen, partly because of high consumer prices (although these have now tumbled) and the widespread adoption of more fuel-efficient systems. There is also the longer-term change in UK energy policy, which favours alternative technologies such as renewables over gas when it comes to generating power.Reducing the company’s exposure to gas, theoretically, will increase growth rates allowing the group to focus on faster-growing electricity networks. In effect, it is a bet that power is likely to need more new infrastructure in future years than it will gas.Profits in these utilities are ultimately tied to the cash level of net new investment that is required to build the pipes or wires that comprise the regulated asset base. Put crudely, increase the amount of cash you are pumping in at a faster rate and that should make the profits go up quicker too. Now this may sound plausible enough on the surface. But step back, and it bears the hallmarks of an act done not to make the underlying business run any better, but rather to manage the company’s stock price. Granted, the move may achieve what National Grid’s chiefs hope, which is to grow the company’s regulated asset base at close to 7% rather than the 3-4% growth rare it might otherwise achieve.So, a transaction that serves little industrial purpose will leave income investors scratching around ever harder for yield in a thinner listed market. It shows again the perverse outcomes that can follow when managers forget their job is to run a business that adds value primarily by means of the goods and services it provides to customers. So who really wins out of this deal?
