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Pru and Invesco go nuclear

• Robert Peston
• 1 Aug 08, 08:39 AM

Depending on your view of the intrinsic value of , and the are either heroes or villains.

Around 10pm last night British Energy's board decided it could not agree to a takeover by EDF, having been told that afternoon that these two big investment institutions, which together control 22% of the nuclear generator, were not prepared to accept 's revised takeover offer of 765p a share, which valued the company at more than 拢12bn.

At 11pm, British Energy delivered the news to the French energy colossus. Its reaction was probably a bit more colourful than a mere "zut!" - since detailed preparations had been made for triumphant declarations that were supposed to be made today.

But who delivered the painful message to Gordon Brown, at his Suffolk retreat? It would have been a plucky individual, since the prime minister has staked his reputation on a strategy for meeting the UK's future energy needs with a massive nuclear investment programme - and the EDF takeover of British Energy was supposed to deliver the bulk of this investment.

And in a way, this would have been a bit of family business, since the prime minister's brother, Andrew, runs EDF's press relations in the UK.

So what went wrong?

Well, Invesco and the Pru expect oil and gas prices to remain high for years to come - and on that basis they believe British Energy's shares are worth much more than what was on the table.

That's why a deal that was supposed to be announced on both sides of the Channel first thing this morning - and would have been hailed in a government press release as helping to deliver the UK's vital future energy requirements - imploded.

Bridging the gap between these two British Energy shareholders and EDF will not be easy, because the French power giant had been reluctant to push up its bid from the 拢7 it put on the table a few months ago.

There may be some scope to tweak the so-called "contingent value rights" being offered to BE's shareholders as an alternative to pure cash. These rights would have given shareholders who opted for them a share in the nuclear generators' future success: incremental payouts would have been paid to shareholders in the years ahead if British Energy's output and if the power price were above certain specified levels during the coming decade.

So maybe a more generous forumula for delivering such future payments may still tempt Invesco and the Pru to say yes. But executives and members of the government close to the deal are pretty pessimistic that the takeover can be rescued.

I have to say it's a bit odd that British Energy's advisers, Rothschild and JP Morgan Cazenove, weren't able to warn the company's board a bit earlier that the prospects weren't great for securing the agreement of these big investors.

Apparently the reason why investors' attitude was tricky to gauge was because of the difficulty in putting a monetary value on the contingent value rights.

Among those feeling bruised today is the business department, , which controls just over 35% of BE.

BERR - which has responsibility for energy policy - was planning to hail the deal as facilitating plans to fill the gap between our energy needs and generating capacity that will yawn open in the coming decade.

That said, the takeover also brought problems, in that ministers were nervous about being seen to be giving a quasi-monopoly over the UK's energy security to a gigantic power business, EDF, controlled by the French government.

But what mattered more to the government is that the deal offered a route-map to a UK in which the lights would be kept on.

What will probably have to happen now is that agreements to build new plant will have to be negotiated on a site by site basis by British Energy - and by the , which controls older nuclear stock that also offers the potential for the building of modern generating capacity.

In fact BERR had been planning this morning to announce how the Nuclear Decommissioning Authority's property could be used to promote competition to an EDF-controlled British Energy: John Hutton, the secretary of state of business, would have hailed the likelihood of the likes of of Germany building new nuclear plant. But an announcement about the future of the Nuclear Decommisioning Authority has been postponed too.

Arguably all of this mess could have been avoided if BERR last year hadn't sold part of its BE stake. Under pressure from the Treasury, it disposed of 450m BE shares to raise 拢2.34bn - a third less than the shares are worth today.

If BERR had kept that holding, it would still have majority control of BE, rather than just 35.2%, and neither Invesco or the Pru could have determined BE's future.

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