United Utilities may be forced to break up its divisions following delays to its proposed telecoms...
United Utilities may be forced to break up its divisions following delays to its proposed telecoms IPO. The telecom IPO promised to "de-couple" the company from the water sector and for several months after its announcement the company's share price rose on the back of the TMT hype, only to fall as the tech boom collapsed. Now a much needed IPO isn't a credible option.
But a break-up of the group spinning off Vertex, the support services and outsourcing unit, and Norweb Telecom could return up to £1bn to shareholders and streamline the company. In its existing structure, the company has all the difficulties from being a multi-utility in the present market and none of the benefits.
The company has been able to reduce costs by merging the management of its water and power divisions through Vertex, and by selling the power business, Norweb Energi to US-based TXU for £486m.
Vertex manages the company's internal divisions and those of other external organisations. External sales now account for 50%, and if these continue to grow by analysts expectations at 20% a year, and 7% margins are achieved a comparative rating would suggest a valuation of at least £360m.
Despite the threat to the Norweb Telecom IPO and pre-break up speculation threatened by an increasing TMT downturn, analysts estimated a fair price and short-term term price target between 600p and 635p.
But without Norweb Energi, second half profits are not likely to match first half levels. And management needs to demonstrate how it's going to unlock some value for shareholders; otherwise, valuations are likely to stagnate.
Profits have taken a big hit following the regulatory review, and Norweb Energi's loss will substantially affect overall revenues.