Northern’s shares closed up 21p at £11.12.Mr Morris told shareholders: “You would be giving up significant value by accepting the Trafalgar House offer. A continuing investment in Northern Electric would be worth significantly more to you.”The measures proposed by Northern Electric would leave the company with debt gearing of 225 per cent by March 1996, which is unprecedented among UK utilities and compares with Northern’s cash-positive position last September. The company said that its plans would be funded through bank borrowings and that gearing would fall to 100 per cent by March 2000.Mr Morris said he is “comfortable” with the level of gearing. “This is a secure business with a predictable revenue stream. The gearing certainly is not crazy because it’s bankable and entirely manageable.”He added that Northern would bring down its borrowings through a variety of measures, including tight cost control. The company has already said it will cut 520 jobs this year and 200 in each of the two following years. It also intends to rein back on capital expenditure on non-core businesses.City analysts said the defence shows the strengths of the regional electricity firms and added that the other 11 companies in the sector would be under pressure to produce similar measures to increase shareholder value.

Nigel Hawkins, an analyst with Hoare Govett, said: “The question is, do the other companies do something now or do they wait until a predator comes along?”Trafalgar House, which has until next Friday to increase its offer, said that Northern’s proposals would leave “a rump burdened with an alarming level of new debt and expensive preference shares.”Nigel Rich, chief executive, said: “That is not a defence, that is an argument for Northern Electric shareholders to accept the Trafalgar House offer or sell their shares while they still have the chance at these prices.”Although the bid has been given the go-ahead by Michael Heseltine, president of the board of trade, it could yet be referred to the Monopolies and Mergers Commission by Professor Stephen Littlechild, director general of electricity supply, who is concerned about his ability to regulate in the event of a takeover.. What price an emaciated Northern Electric? That is the question shareholders are going to have to decide now that the main planks of the company’s defence against Trafalgar House’s £1.2bn bid are out in the open. In a defence document which somewhat unfortunately has as its front cover a picture of the Tyne Bridge which was built by Trafalgar House, Northern Electric has promised a package of payouts to shareholders worth some £5.07 a share. The bulk of this would be accounted for by flotation of the National Grid and new underwritten preference shares.

Even so the £1.50 special one off dividend being promised and other factors involved in offering such a tempting package of goodies, is enough to send debt gearing soaring from virtually nothing now to 225 per cent
In most companies this would be regarded as dangerously, possibly terminally, high. Regional electricity companies are quite unlike anything else, however. As monopolies which are governed by a regulator who has proved naively kind, they are a licence to print money. Northern’s claim that it can sustain a dividend 33 per cent higher than at present and within five years still have gearing down to a more manageable 100 per cent, could well be true. If it is, then the company is plainly worth substantially more than the £10.48 a share Trafalgar is bidding.This is why. Assuming the new, highly leveraged Northern trades on a market yield of 4.5 per cent, then it ought to be able to command a stock market price of a little over £9 a share.

Add back the £5.07 handout and the full valuation comes out at more than £14 a share. Ingenious, isn’t it? The problem is that the stock market doesn’t buy it. Last night the shares were trading at only £11.12, suggesting a valuation for the Northern stub of little more than £6 a share.In truth this is actually the more realistic valuation. For a low risk business in the current economic climate, 225 per cent gearing looks reasonable but how would Northern fare should interest rates rise markedly or should a future Labour government impose a windfall tax on the utilities? Furthermore, there is nothing new in the defence document for customers. Is it credible that even a regulator as accomodating as Professor Stephen Littlechild would not insist that largesse on this scale is matched by a similar handout to customers?Northern may be able to extract a few coppers more out of Trafalgar with a defence that deserves full marks for ingenuity but its chances of seeing off the invaders completely look remote. As far as the City is concerned, all 12 RECs are much of a muchness.