Powergen doubles distribution with Midlands

Powergen, the electricity generator and supplier, is doubling its distribution network by buying Midlands Electricity for £1.15bn.

Powergen, which first attempted to buy Midlands in 1996, stepped in after bondholders blocked the sale of Midlands to Scottish & Southern Energy this summer. Powergen hopes to succeed this time by switching cash from Midlands' equity owners to the bondholders.

The 2.4 million Midlands customers, and a similar number taking supplies from the East Midlands company already owned by Powergen, will share £32m in reduced tariffs over the next five years after the two areas are merged.

Powergen has itself been taken over by German power group E.ON since its first bid for Midlands was blocked by the then Conservative government.

Terms for Midlands announced yesterday are £36m for the American owners Aquila and FirstEnergy and £626m to bondholders, who receive 95.8p in the pound. Powergen will also take on £484m of debt. Scottish & Southern's £1.1bn offer was made up of £43m for the equity but only 86p in the pound for the bonds.

Powergen chief executive Paul Golby described the deal as "the last big piece in the jigsaw to transform Powergen from a pure electricity generator into an integrated power company." It will leave Powergen as the country's second-largest generator, distributor and retailer of electricity with a total of 9 million customers.

The deal needs the approval of regulators on both sides of the Atlantic. It also requires the support of 95 per cent of bondholders. So far about half of them have given written irrevocable undertakings to vote in favour.

Mr Golby estimated cost savings of at least £50 million a year.

He said: "Clearly there will be some job losses from the distribution business but savings will not just be in jobs. There is duplication in the IT systems. We will have more muscle in the price of materials and services."

The number of jobs to go has not been decided and there would be full consultation. East Midlands has 1,000 employees in the distribution business while Midlands has 1,900 despite having the same number of customers.