National Grid gassed with sale

Last week, a consortium led by the Australian ‘vampire kangaroo’ Macquarie bought a further 20 percent stake in National Gas (the gas transmission arm of National Grid). Following on from an original 60 percent purchase last August, the group now has 80 percent control, and retains the option to take full ownership should it desire. It’s a development that signifies a significant shift in National Grid’s energy and climate plans (not to mention finances) but raises tricky questions about the role of private equity in UK infrastructure.

National Grid will be pleased to receive an immediate ￡700 million cash injection and it has made promising noises about using this money for the repayment of debt, rather than the short-term sugar rush of dividend payments and bonuses that do nothing to enhance long-term business viability. That may not please some shareholders, but with the travails of the water industry doing the rounds, it is the right call for sustainable shareholder returns.

Included in this latest deal is the option between May and July next year for the consortium to take over the final 20 percent from National Grid. It seems extremely likely that the Macquarie-led consortium will take up that offer, with Macquarie’s European Head of Infrastructure Martin Bradley saying they “aspire to acquire the remaining interest in due course.” National Grid are only too happy to accept, and there is nothing to stop the deal going through.

Considering the government did not intervene under the National Security and Investment Act in either the original 60 percent purchase or this latest deal, intervention on the grounds of national security seems extremely unlikely. Australia, despite the actions of their cricketers, is not a hostile actor to the UK.

In selling off the majority of its gas business, National Grid seems like it is trying to entirely absolve itself from fossil fuels (and the associated climate risks), at least directly. But in simply selling off its gas business rather than using its full business might to assist with a transition to electricity and renewable resources, it will not make a significant impact overall on global emissions.

Macquarie itself has said it remains committed to gas, and the fact that emissions will be occurring, just under the auspices of another owner, adds another layer of confusion to what has been a sometimes contradictory position from National Grid regarding decarbonisation. Nevertheless, it follows on from previous announcements declaring a shift towards electricity, and if funds from the sale can be harnessed to increase grid connectivity and renewables projects, then that is a positive.

Less positive may be the role that Macquarie has on National Gas as an entity. Given its track record with UK infrastructure, Gary Carter, the GMB’s National Officer, is not entirely unjustified in saying the deal “should send alarm bells ringing”, pointed out how it “left Thames Water with massive debts that brought it to the edge of collapse”. Southern Water, also under its ownership, was “repeatedly fined for dumping sewage in rivers and seas” whilst Cadent Gas, “which makes massive profits – ￡950 million last year –paid ￡350 million in dividends whilst looking to close [the] employees’ pension scheme.”

The risk, as seen with water, is that such private equity-funded deals become increasingly more attractive for executives and come to predominate the sector. The entire modus operandi of PE, cost cutting, short-term profit maximisation, mega payouts (with the odd bit of tax avoidance) runs counter to the principles of long-term business sustainability.

Just as water is having to reckon with the role that non-listed companies played in contributing to the current state, so too energy firms, and shareholders, should be very careful about welcoming in such investment.