Power market developments

Westinghouse goes east

14 March 2006

The jury is still out on whether or not Toshiba paid over the odds for Westinghouse. But there have been some compelling arguments put forward by both the prosecution and defence. By Chris Webb

There is a winner and usually a number of losers in any competitive bidding procedure. None has been more closely watched in nuclear circles than the battle that has been waged behind closed doors for Westinghouse, its culmination a nail-biting opening of bid documents at the beginning of this year.

Toshiba won the $5.4 billion auction for BNFL’s Westinghouse Electric subsidiary in February, beating General Electric (GE), Mitsubishi Heavy Industries and The Shaw Group to the final post. Toshiba closed in on the leaders in the takeover race from the position of relative underdog late on in the bidding process. But the huge price paid by the group for Westinghouse, the US-based nuclear engineering group which operates Britain’s only nuclear fuel manufacturing site, namely Springfields, has prompted a mixed reaction from analysts and other industry onlookers. So, what will Toshiba get for its money?

The Japanese conglomerate is banking on a quantum shift in the global demand for new nuclear plants as a means to help assure secure electricity supplies and to mitigate the effects of climate change. The company knows it’s in for the long game. But with it - it reckons – beckons the prospect of a possible 130 1.1GWe plants to be built worldwide by 2020 and, Toshiba believes, its combined half share of the market resulting from the Westinghouse purchase should see it in good stead to pick up significant orders.

Toshiba’s strengths lie in construction, maintenance and other services, but are chiefly associated with boiling water technology in the ABWR. Westinghouse brings to the party its considerable experience in building PWRs worldwide, but particularly in the USA and, similarly, in maintenance and service solutions. The marriage of the two groups is more than one of convenience, or so Toshiba believes. Investors were won over by the prospect of no less than a trebling of the group’s ¥200 billion ($1.7 billion) turnover by 2015, to between ¥600-700 billion ($5.1-5.7 billion).

Any suggestions that Toshiba, Japan’s second-biggest electronics maker, may have overpaid for the business were quickly dispelled by Toshiba’s chief executive, Atsutoshi Nishida, who said: “The price might seem quite high ... but given the potential of this business we believe that the price we have paid is the correct price.” He added: “This is hugely significant for Toshiba’s future growth. We are pretty confident that no other company will be able to match the breadth and depth of this combination.”

The jewel in the crown of the Westinghouse acquisition is undoubtedly the AP1000 reactor, developed by the American group and in which so much interest has been shown in emerging nuclear markets, particularly China and other Asian regions. But Toshiba believes there exist many more synergies between the two companies and their products, ready to be exploited. The potential for expanding the turbine and BWR business is a case in point as Toshiba taps into Westinghouse’s worldwide sales capability.

Toshiba may be confident that the purchase of the US-based nuclear power company will pay off, but others are rather more shy of the figures. The deal could trigger an unfavourable reaction in the Japanese electronics giant’s finances. In paying so much for Westinghouse, effectively three times sales and almost 40 times operating profit, it is exposed to a considerable gamble over the future of nuclear power worldwide.

Nishida aims to calm the nerves of investors by selling off up to 49% of the Westinghouse equity. He said talks are going well with “five or six companies” seeking to hold the remaining share. He declined to give details or identify the companies, although he ruled out GE, the US industrial products, financial services and media conglomerate, to the surprise of many. “There is no talk at this point of GE taking a stake,” Nishida said in February. However, in a move expected to throw a sweetener to future nuclear markets in the USA, there is speculation that The Shaw Group could take up a minority stake.

As bidders for Pennsylvania-based Westinghouse, both GE and Mitsubishi could conceivably be considered as in line to take a stake and so remain in the top league of world players. Conversely, their contribution may be seen as a threat, which would explain why Toshiba would prefer to consider the possibility of including a number of minority-stake partners in the Westinghouse prize. GE and Toshiba have been working together in developing technology since 2001, and Nishida said Toshiba wants that relationship to continue.

Where does this leave state-owned BNFL? The company had been negotiating the deal for some time and the sale attracted huge interest from overseas buyers, pushing the final price to almost three times initial expectations. BNFL bought the business for $1.1bn in 1999.

“We have ended up with an excellent result for the British taxpayer,” said BNFL chief executive Mike Parker after the deal was officially announced. Others are not so sure. The sale has proved controversial in some areas and the initial bonanza for British taxpayers could represent only a short-term gain, say its critics. Among them is Norman Lamb, the UK’s Liberal Democrat trade and industry spokesman. Lamb said he feared the sale was “driven more by a need to fill the black hole in the chancellor’s finances rather than good, objective reasons.” He added: “We must question if it makes strategic sense to sell Westinghouse now.”

That view was echoed by Prospect union national secretary, Mike Graham, who criticized the British government for its “shortsightedness”. He said: “The Japanese are far more forward-looking. This brings a massive short-term gain to the British taxpayer and Gordon Brown [the British chancellor] but one should look beyond that when it comes to the nuclear industry.”

The sale marks the start of a seemingly unstoppable break-up of BNFL. It has already sold BNG America – which was part of BNFL subsidiary British Nuclear Group – to EnergySolutions. The sale included the wholly-owned subsidiary Manufacturing Sciences Corp and BNG Fuel Solutions. EnergySolutions, a Salt Lake City, Utah-based company, is owned by a private investor group led by Lindsay Goldberg & Bessemer (LGB), a New York-based investment partnership that invests primarily in privately held businesses. The deal is part of a larger transaction involving the combination of three US nuclear waste management companies – BNG America, Envirocare of Utah and Scientech D&D.

British Nuclear Group (BNG) itself, which carries out site operations and cleanup work at the former BNFL sites is also up for grabs, but the sale ran into difficulties earlier this year following a bitter row at the top of the Nuclear Decommissioning Authority (NDA), which owns the former BNFL sites and facilities. A quick sale of BNG is opposed by the NDA chairman, Sir Anthony Cleaver, in the belief that its value will rise if it wins some of Britain’s nuclear decommissioning contracts. The government’s ongoing energy review has also caused ministers to postpone the sale.

In an industry not noted for its excesses of ebullience, the excitement about the prospects for new nuclear power stations has reached a level unknown for at least two decades – a level of excitement that has undoubtedly contributed to boosting the price BNFL succeeded in getting for the Westinghouse subsidiary.

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Westinghouse in talks to extend Springfields deal

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