Goldman's odd loss of Energy

The day after losing a bidding war with US rival and eventual winner Texas Utilities, Fred Buckman, chairman of PacifiCorp, had a painful conference call with industry analysts and his own shareholders. He tried to explain why he had spent so much time and money - he admitted to between $172 million and $185 million - trying to buy the British-American utility Energy Group, only to pull out at the last minute.

And who would history judge as most responsible for this near-farce? Was it PacifiCorp for dithering and ignoring the advice of its adviser, Goldman Sachs? Was it Goldman for not pushing its client to make deal-clinching moves at the right time? Was it the winning bidder, Texas Utilities, and its advisers, Lehman Brothers and Merrill Lynch, who went on the offensive as soon as it got involved at the end of 1997, despite having no regulatory clearances? Or was it Energy Group itself, whose senior executives managed to manoeuvre the various interested parties into securing the highest price possible for the company?

Texas Utilities bid £8.40 a share for Energy Group in early March, 20 pence more than PacifiCorp's highest offer. This was more than anyone had expected the company to fetch since Energy Group was listed on February 24 last year. Before then it had been part of the Hanson conglomerate, which had decided to demerge its non-construction businesses in an effort to enhance shareholder value.

But Energy Group was a rather strange animal which was hard to value. It comprised two parts: Eastern Electricity in the UK, a well-respected utility whose management had managed to more than double profits to £450 million ($750 million) within four years; and Peabody Coal in the US, which supplies nearly 10% of US coal requirements but which has been saddled with liabilities arising from successful claims from its employees for work-related diseases such as black lung.

Its listing at £5.25 a share valued Energy Group at £2.7 billion, but never in the course of the bidding war in the first few months of this year did any analyst value the company beyond £8 a share - though Ed Tirello at BT Alex Brown mentioned that £9 could be bid before the acquisition would dilute earnings.

But the process shouldn't have gone that far. Goldman and PacifiCorp arguably had ample opportunity to secure Energy Group before any other bidders were ready; but once they were - in the form of Texas Utilities and, for a few weeks, Nomura's London-based principal finance group - the initial bidders were slow to react and were repeatedly outmanoeuvred. "Every time a move was made by the competition, we expected Goldman to match it, and push their opponents to show their hand," says one banker involved in the battle. "But they were never there."

Price is an insufficient reason to explain how PacifiCorp and Goldman Sachs managed to lose what was widely considered to be a done deal. It was more a question of strategy and planning, and competitors have been quick to pounce on Goldman's role. "John Thornton would never have allowed this to happen," comments one in summing up Goldman's role as advisor to PacifiCorp. Thornton, a Goldman Sachs partner and now for over a year head of Asia-Pacific, was previously co-head of investment banking in London, and is credited with turning Goldman into a powerful force in M&A in Europe.

Eric Anstee, Energy Group's finance director was constantly annoyed by what he calls the firm's lack of urgency in pushing to win the bid. Others get rather more personal, asking whether Meyrick Cox, vice-chairman in mergers and acquisitions and Goldman's pointman on the negotiations, was the right man to choose. "Cox just didn't have the seniority and the internal clout to pursue this deal," says one banker. "What was needed was a partner overseeing the deal."

This is a contentious point; Cox was the man who, with Nick Walsh, had been introducing Goldman to the electricity sector since 1994, and had correctly predicted that US utilities would start buying UK assets, and was being laughed out of offices for the privilege. When the electricity chiefs realized he was right, they called him back in and he advised several of them in their negotiations to sell. As for seniority in the Energy deal Cox points out that partner and head of M&A in Europe Rick Sapp was heavily involved in the deal, as were several managing directors.

First moves

PacifiCorp submitted its first bid in mid-June last year, two months after the first executive meetings between the two companies began and following nearly four weeks of negotiations in New York. The offer of £6.90 a share, plus a dividend payment of 5.5 pence, valued Energy Group at £3.6 billion, and was quickly accepted by 67% of the shareholders.

But at the start of August, UK trade minister Margaret Beckett referred the bid to the monopolies and mergers commission (MMC), a move which automatically nullifies any bids on the table. Some have argued that Goldman Sachs should have expected this, but few others did, and from the price point of view Goldman could not have advised PacifiCorp to come in at a better time. "After the initial reaction to the demerger, and before Energy Group had established itself with the market, its shares came off considerably," says Cox. Listed at £5.25, it quickly rose to £5.70 before dropping. "We started talking to them when they were trading at their nadir of between £4.60 and £4.70 a share."

PacifiCorp and Energy Group had been keen to see the deal go through. Both sets of management were pursuing a strategy of acquisitions and mergers to grow into global energy groups.

Energy's executives have long been respected both in the City as well as within the industry. Chairman Derek Bonham, executive chairman John Devaney, finance director Eric Anstee and Irl Engelhardt, chief executive of coal subsidiary Peabody had in the four years leading up to the first offer managed to more than double the profits of the company to £450 million, and have a reputation for focusing on creating value for shareholders. But the UK tabloid press classes them among the "fat cats" - executives who have made unacceptably large personal gains from companies which until recently were publicly owned. Even some bankers share this view. "I think they were more concerned with what they would get out of any deal than with what would happen to the company," says one banker involved in the year-long process.