Battle to keep ScottishPower in Scotland

Key points

• Scottish utility company faces being bought by German firm

• E.ON's bid has led to restructuring of the company

• But it seems likely that ScottishPower will still be sold

Story in full

AS IAN Russell gazed into the bathroom mirror of his Edinburgh home on Monday morning, he could be forgiven for feeling a little stressed.

The chief executive of ScottishPower had spent the weekend fretting over plans to restructure the giant company. Not just any old restructuring either, but one that would lead to the sacking of two of his top executives - David Nish and Charles "Chuck" Berry.

If that wasn't pressure enough, he also faced a growing threat from the silent powers of the stock market. ScottishPower's shares had soared in value in the past three trading days, as rumours flew that its German rival E.ON - the owner of Powergen - wanted to buy the company.

Wary of the threat, Mr Russell knew he had to act quickly. As he set off on his daily commute to the company's HQ at Pacific Quay in Glasgow, he called a series of crunch meetings with his closest boardroom allies. The chairman, Charles Miller Smith, and the finance director, Simon Lowth, were duly summoned and agreed that the restructuring must be finalised as soon as possible.

Mr Nish and Mr Berry were to be dismissed, alongside the human resources director, Mike Pittman, and the communications chief, Dominic Fry. More job cuts would be indicated across the group's 6,000-strong Scottish workforce - the aim being to strip 60 million of costs from the company in 2006.

Mr Russell gave the same explanation to the four sacked directors as he was to give several times the following day, when his decision would be revealed to staff and the outside world. He would hark back to late May, when ScottishPower announced the 5.1 billion sale of PacifiCorp - its giant US business - to the world-famous entrepreneur Warren Buffet.

The Portland-based utility had accounted for about two-thirds of ScottishPower's valuation of 8.2 billion, meaning the company would become much smaller when the deal went through. The idea of the restructuring was to slim down the group - stripping out the four directors in the process - preparing it for life as a smaller, independent, predominantly UK-based utility.

He did not mention that the group's smaller size was what had attracted E.ON's attention or that the downsizing was threatening the independence of one of Scotland's biggest companies. To this day, Mr Russell has yet to publicly link the two events - despite the asking of questions in parliament. Neither did he bring up the 9 million in shares, pension payments and other incentives he could make from a deal.

Most aghast at his dismissal was Mr Nish, the group's head of infrastructure. His title may sound rather dull, but most followers of ScottishPower had pencilled him in as the most likely successor to Mr Russell. Until December, he had been the finance director and Mr Russell's right-hand man. It was thought his new appointment was to allow him wider experience before the big promotion, and he was present when the sale of PacifiCorp was unveiled to the market in London.

When asked by The Scotsman if there was any acrimony surrounding his departure, Mr Nish said: "No comment."

Mr Russell added: "This is not what I wanted - they are good friends and colleagues." Yet, he insisted that, with the jettisoning of PacifiCorp, he no longer needed a middle man between the hands-on operators and himself. The rest heard the same story.

While Messrs Nish, Berry, Pittman and Fry trudged off to the car park, Mr Russell was immediately called into action once again. At 5:58pm on Monday, E.ON supplied City traders with what they had been expecting since the day PacifiCorp was sold.

"E.ON confirms that it is considering its options regarding a possible takeover of ScottishPower," it said. The statement complied with strict market rules - that if shares in a company rise substantially on the back of takeover speculation, the company in question has to confirm or deny the rumours. The cat was out of the bag, and Mr Russell had already put up his first line of defence.

On Tuesday morning, the details of the restructuring were released to the market and to regular employees. First, Mr Russell summoned his 150-strong "senior management team" to hear the news, then told the entire UK workforce via a recorded phone message.

Staff were stunned: they had not seen it coming. Away from the corporate HQ, the news spread like wildfire through the company's engine-room at Spean Street in Cathcart, where 2,000 staff are based.

That was where Mr Berry was based, and many worked under his control. "We couldn't believe it," said one staffer. "Berry is a good guy and was so approachable. He worked out in the company gym, ate in the canteen and always had a bit of chat for everyone. Nish was a bit of a wet fish in comparison, but we all thought he was doing quite a good job."

It is believed the job cuts will come in the back-office areas and in overstaffed support functions - anything related to the running of PacifiCorp. Insiders are keen to point out that it will not affect frontline staff and the call-centre functions.

Few at the company could quite understand how ScottishPower had gone from Scotland's third biggest listed firm to one fearing for its independence and willing to sack half its board at the same time.

The answers to this question are to be found in the company's not-so-distant past, at the time of the acquisition of PacifiCorp in 1999. Mr Russell was not the chief executive at the time but, as finance director, he played a huge part in the move. It transformed the firm from a UK-based player to a behemoth straddling the Atlantic, and the group paid $10 billion for the privilege.

But the adventure proved disastrous. Following nearly six years of calamities and unmet expectations, Mr Russell sold out at $9.4 billion. The total loss worked out over the years at about 442 million. It left the smaller group vulnerable to a takeover from rivals at home and overseas, and facing an uncertain future.

Mr Russell has so far insisted that selling PacifiCorp was the best result for the company's shareholders, as the proceeds would be repackaged as a dividend. He claims not to have put any thought into whether ScottishPower would become a takeover target after the deal, although others saw it coming.

Mr Russell is right about one thing - the sale of PacifiCorp has been good for shareholders; but not because of the dividend. Some number-crunchers are predicting that to buy out the shareholders any group would have to pay 600p a share - 11.2 billion - compared with the 442p the company was worth before the sale of PacifiCorp. That's a big return - but at the expense of corporate Scotland.

Meanwhile, investors in Perth-based Scottish & Southern Energy have done much better, even though Mr Russell's 1.4 million-a-year salary is nearly twice that of SSE's Ian Marchant.

However, ScottishPower staff say they, too, have share options waiting to be cashed - and the soaring price could help soften the blow of redundancy.

The future is not bright for ScottishPower. The only positive outcome would be a successful counter-bid from SSE, keeping ownership in this country. But that would be blocked for competition reasons.

That leaves E.ON as the clear favourite for the prize, and it has pots of money with which to achieve its goal. The most likely outcome is that ScottishPower will soon be a German company.

McConnell offers full support to under-fire company chief

JACK McConnell, the First Minister, yesterday held a private meeting with the head of ScottishPower as he came under pressure to ensure that Scotland's third biggest listed company does not fall into foreign ownership.

The Scottish National Party turned the possible takeover into a major political issue at First Minister's Questions and sought an assurance from Mr McConnell that he would fight any takeover.

Its continued existence as an independent business is in doubt after E.ON, a German utility company which owns Powergen, confirmed it was considering a takeover bid.

The issue is complicated by ScottishPower's large presence in the Glasgow Cathcart constituency, which is facing a by-election in three weeks.

Talks were held between Mr McConnell and Ian Russell, the chief executive of ScottishPower, as fears grew for the company's future. It is not known whether Mr Russell asked for the First Minister's help in trying to fight off a foreign takeover or whether Mr McConnell offered help.

A spokesman for the First Minister refused to go into details about the talks, stating only that the two men had agreed to keep in touch as the matter developed.

Mr McConnell is in a difficult position. He would like it to remain a Scottish firm with its HQ in Glasgow, but European rules prevent interference by governments in companies' commercial decisions. The First Minister can offer his verbal support but, at least at this stage, very little else. The SNP tried to exploit this yesterday when Nicola Sturgeon, its Holyrood leader, tried to secure a commitment from Mr McConnell that he would fight any foreign takeover of ScottishPower.

Ms Sturgeon's decision to seize on the possible takeover signals the SNP's intention to use the uncertainty over the company's future in the by-election campaign.

She suggested any takeover bid for ScottishPower should be resisted as "strongly and vocally" as was an attempted takeover of the Royal Bank of Scotland in the 1990s.

The First Minister said:

"I would certainly hope that they will remain not just headquartered here in Scotland but very much in control of their own affairs here in Scotland."

HAMISH MACDONELL, SCOTTISH POLITICAL EDITOR

Rise and fall of a giant

SCOTTISHPOWER'S journey towards its current predicament started in 1999, when it agreed to buy US firm PacifiCorp for $10 billion (5.4 billion).

The acquisition of the utility, based in Portland, Oregon, was supposed to turn the Glasgow firm into a global force. But the deal was the start of the company's troubles.

Ian Russell took over as chief executive in April 2001, and embarked on a disastrous 12 months. The firm was forced to report losses of nearly 1 billion exactly a year later, thanks to the effects of a power crisis in California and a write-off relating to the sale of its Southern Water division in the UK.

The company then recovered somewhat, but problems at PacifiCorp re-emerged at the end of last year. After pledging to report profits at the US division of $1 billion for the year ending March 2005, Mr Russell was forced to admit last November that the target would not be met.

The company blamed poor weather for this, but six months later Mr Russell made the surprise announcement that PacifiCorp had been sold for $9.4bn to venture capitalist Warren Buffet. The loss over the years worked out at 442 million, while the deal with Mr Buffet is still subject to regulatory scrutiny.

Takeover rumours grew and E.ON admitted on Monday that it was considering an approach, while, a day later, Mr Russell dismissed four top directors.