Is LE armed to win UK power struggle?

With Seeboard and a new operating structure in its pocket, London Electricity now aims to take on rival Centrica. But direct selling scandals and uncertainty surrounding its Virgin brand could hinder its performance, says Sonoo Singh

London Electricity Group finally realised its dream of becoming one of the five largest energy retailers in the UK when it snapped up Seeboard and its 1.9 million customers this summer. The Seeboard brand joins London Electricity (LE), SWEB and Virgin Energy brands in serving 5.5 million customers their gas and electricity.

The deal means that LE is at last able to compete head on with the national champion, Centrica-owned British Gas. But in order to have a fighting chance, LE Group must first get its house in order.

In September, the energy watchdog Energywatch named and shamed LE Group as being one of the worst performers in meeting standards for direct selling. The company has also been hit by a spate of negative publicity surrounding its Virgin Energy brand after a series of mis-selling complaints (MW July 11).

Changes are already being put in place. LE Group last week restructured its operations by introducing three new divisions – a customer division to include the sales and retail business; a networks group responsible for infrastructure, and an energy division covering power generation. Under the new structure Jon Kinsey’s role as LE Group’s managing director no longer exists. As a result the former British Gas marketing director has left (MW last week).

According to LE Group, which forms part of the state-owned Electricité de France (EdF), the introduction of three operating divisions was necessary after the purchase of Seeboard to maintain management consistency across all four of its brands. Before the restructure, each brand was run as a separate business.

But one industry source claims the restructure was in fact triggered by the negative publicity surrounding its direct selling.

Another industry source is surprised that Kinsey has no role to play in the new structure: “Kinsey’s departure will be a setback for a company the size of LE Group. With his British Gas background he was seen as someone capable of leading LE’s strategy of growth.” Kinsey was made managing director of the group last year, when it acquired a controlling stake in Virgin Energy, where he had been managing director.

Kinsey, a former marketing director of Camelot who oversaw the launch of the National Lottery, has no job to go to.

Seeboard managing director Peter Hofman becomes one of four managing directors in the consumer division. He will be responsible for retail and marketing.

Analysts believe that a restructure at LE was inevitable. One City analyst says: “The new structure will enable EdF to consolidate after a wave of acquisitions. And it needs to do so to deliver its commitments to its shareholders at the EdF Group.”

EdF muscled its way onto the UK scene in January 1999, when it acquired the LE brand, subsequently acquiring SWEB. It launched Virgin Energy in partnership with Sir Richard Branson in 2000, and last year increased its 25 per cent stake to 75 per cent to take control (MW July 12, 2001).

An LE Group spokesman says: “The acquisition phase has come to an end for us. The purchase of Seeboard was a significant part of the jigsaw and completes the group’s picture. We have now increased our customer base and distribution network and the restructure will put us in a better position to be a successful long-term player in the market.”

While LE Group has a significant presence in the South through the LE, SWEB and Seeboard brands, it had been hoping to attract customers across the country by pushing Virgin as a national brand. But rivals claim that LE may be forced by Branson’s Virgin Group to drop the Virgin name, after complaints that thousands of residents were conned into buying gas and electricity with hard-sell tactics. The two companies are in talks over the use of the Virgin brand (MW August 1).

Analysts claim that it is unlikely LE Group will drop any of its three regional brands, replacing it with one.

Frost & Sullivan energy consultant Klaus Huhn says: “Branding is a tricky business in the energy sector. For instance, the average UK household might not want to buy their electricity from EdF, which is French.”

Another City analyst says: “The regional brands that LE Group has are extremely strong, so I do not think it will make sense to axe them, even in the long term.”

But rival npower, which is now owned by Germany’s RWE, has been investing heavily in advertising and sponsorship to establish national brand recognition and expand its 7 million customer base. It is second only to Centrica, which has 5.5 million electricity and 13 million gas customers.

Centrica is hoping to take its battle for new customers overseas onto the homeground of foreign rivals, which have secured a foothold in the UK market through acquisition. It is lobbying in conjunction with the UK Government to force countries such as France and Germany to drop protectionist legislation preventing UK utility companies entering their markets.

A City analyst predicts there will be further consolidation in the utility sector once the rest of Europe is opened up to competition. However, he adds: “Before that happens, there will still be opportunities to grow in this market. The best and the cheapest way forward is through organic growth.”

Huhn agrees, suggesting that the way forward is to expand into other areas such as telecoms and home services.

But some analysts believe that interest in the sale of Seeboard for &£1.39bn – bids were reportedly received from US-owned TXU; German utility company Eon, which owns Powergen in the UK; Scottish & Southern, as well as LE – indicates there is still scope for growth through acquisition in the UK market. They claim that Scottish & Southern could be the next energy company to be taken over, although S&S denies it is up for sale.

Though EdF’s LE Group has said that its acquisition phase has come to an end, its rivals may want to catch up with the French giant, triggering a further wave of consolidation in the highly competitive UK gas and electricity market.

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