22 April 2002 – The largest energy utility operating in the UK with a value of around £14.8bn ($21bn)will be created following the announcement today that electricity distributor National Grid and gas network giant Lattice are to merge.

The formation of the new company, to be called National Grid Transco, will be subject to regulatory approval although this is nor expected to pose a threat to the deal. The combination is likely to attract interest from consumer groups and politicians.

Both companies have their roots in state-owned monopolies. Lattice maintains the UK’s gas pipelines while National Grid owns and operates the majority of the electricity network. Under the agreement Lattice shareholders will get 0.375 new National Grid Transco shares for each Lattice share.

The merger will give the firms extra strength to build on National Grid’s US presence, and offers the chance for growth outside the highly regulated UK market, a statement on Monday said.

“We shall deploy the combined resources and financial capacity of National Grid Transco to take advantage of the opportunities in the liberalising energy markets abroad, in particular extending National Grid’s successful US strategy,” said National Grid chief executive Roger Urwin.

Irwin described the proposed amalgamation as “as near perfect as you can find” but the companies admitted the deal would see jobs go, as functions duplicated across both firms are cut out, and cost savings estimated at £100m achieved.

Lattice has about 17 500 staff, with National Grid employing about 12 500.

As well as its gas pipeline business Lattice has fibre optic and mobile telecommunications tower networks as well as Lattice Enterprises, a diversified group of businesses providing gas industry related services.

Analyst Philip Hollobone, at SG Securities, said the merger would allow the firms to “accelerate cost cutting… and give investors a very large vehicle which will grow dividends by at least 5 per cent a year”. He thought the deal would be attractive to shareholders.

The formation of a strong energy utility comes at a time of increasing liberalization within the European power sector , which has led to much consolidation. The French state-owned utility Electricite de France has made a number of expensive acquisitions across the continent and Germany’s RWE last month successfully bid for the UK electricity producer and retailer Innogy.

The group are likely to target the US as a priority. It already derives half of its profits from its North American activities.

In March 2000, National Grid acquired New England Electric System (NEES) in the USA for $3.2bn and renamed it National Grid USA. Eastern Utility Associates (EUA), a neighbouring utility, was acquired in April for. In January 2002 National Grid completed a $3bn acquisition of New York state electricity and gas company, Niagara Mohawk Holdings, Inc. (Niagara Mohawk). These acquisitions have positioned the company as one of the top ten electricity companies in the US, with the largest transmission and distribution network in the New England/New York market, serving 3.2 million customers in Massachusetts, Rhode Island, New Hampshire and upstate New York.

The take-over values Lattice shares at around 183-3/4 pence each, only a small premium over Friday’s close of 172-3/4 pence. On Monday, Lattice shares were trading at around 194p while National Grid clambered up 3.5 per cent to 507 pence.

The companies said that they expected to have dealt with regulatory requirements arising from the merger both in the UK and US by October.