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UtILItY WeeK | 6th - 12th JUne 2014 | 7 Comment "When the 12 regional electricity companies were floated in 1990, white goods sales were an important element of their customer offering." Utility Week expert view Nigel Hawkins I n recent weeks, the financial press has been domi- nated by the seemingly failed £70 billion bid by US giant Pfizer for the UK's number two drug company, AstraZeneca. Beneath the headlines, there have been two other stories with a real relevance to the UK utilities sector, namely concerns about a faltering initial public offering (IPO) market – epitomised by the lacklustre response to the Saga IPO – and the planned merger between Dixons and Carphone Warehouse. A generation ago "white goods" sales were very important for many electricity companies. Aer a strong year on the IPO front, investor fatigue may be setting in. The high point was undoubtedly the government's 60 per cent sale of Royal Mail – effec- tively a utility – which was heavily over-subscribed and caused political controversy. Until very recently, subsequent IPOs had done well, including Merlin and Poundland. But last month's Saga IPO was poorly received, partly because its earnings driver is motor insurance. Shares in other IPOs, such as Just Eat and Pets at Home, have also faltered. Importantly, at the behest of the EU, Lloyds TSB now plans to float its 631-branch network. Low-cost Hungar- ian airline Wizzair is also lined up on the IPO runway. If the Saga IPO is widely replicated during the sum- mer, many companies with float aspirations will be sorely disappointed. Some will have to accept a sharply lower valuation, while others will be non-starters. Among this latter category will be several renew- able energy companies, seeking money to build plant, whether wind turbines, waste-to-energy or biomass facilities. They already face many uncertainties, includ- ing a general election, rising interest rates and, most importantly, the government's constantly changing subsidy regime for renewables. All these undoubtedly unnerve potential investors. A depressed IPO market can only raise these risks. The £3.7 billion Dixons-Carphone Warehouse merger seeks to consolidate the sale of IT equipment and white goods within one nationwide retail brand. Its main competition will be online sales. When the 12 regional electricity companies (Recs) were floated in 1990, white goods sales were an impor- tant element of their customer offering. Some Recs oper- ated more than 100 such shops, around some of which potential investors and analysts were wheeled. Even during those halcyon days, any discerning investor could work out that the earnings, dividend and share price driver was the Rec's regulated distribution business, not its electric- ity showrooms. The uproar following Ofgem's botched distribution review in March 1995 underlined that fact. In 1992, three Recs pooled their electricity showrooms into the Powerhouse brand; Scottish Power and Npower were also involved. The business was subsequently bought by a New Zealand retailer but had effectively died by 2006. On the gas front, Centrica's British Gas subsidiary closed its 243 gas showrooms in 1999, with the loss of 1,445 jobs. Heavy losses had been racked up. While more aggressive competition was the prime factor for the demise of utility-run showrooms, the combination of selling white goods and sorting out customer bills on the same premises was hardly ideal. As the smooth-tongued salesman was about to clinch his cooker sale, he was sometimes diverted by an irate customer having a meltdown about a bill. Competition became increasingly aggressive through- out the 1990s as the two white goods big guns – Dixons and Comet – slugged it out. The former prevailed while the latter, despite a history dating back to 1933, suc- cumbed in late 2012. Much of Dixons' range (sold under the Curry's name) relates to IT equipment, but it remains the dominant player in the white goods market. Many potential cus- tomers visit their local Dixons' store to view potential purchases, then they go home and buy online. The planned merger with Carphone Warehouse, facing intense competition from branded stores, such Vodafone and Orange, seeks to address this problem. The question arises as to whether the Recs, or at least one of them, could have built a £1 billion-plus retail business based on what they inherited in 1990. Outwitting the regulator and undertaking new power generation projects became paramount, so other oppor- tunities were accorded a far lower priority. More generally, as recent events have demonstrated, politics and financial markets can change swily. In the former case, Ukip's devastating performance in the European elections is causing massive ructions at Westminster and beyond. In the City, utility shares are active as investors seek to balance the many variables, including regulatory rulings, interest rate movements and political trends. And the IPO market has now sud- denly become rather twitchy. Nigel Hawkins is a director of Nigel Hawkins Associates, which undertakes investment and policy research