It is not often that the takeover of one company by another makes all parties involved look bad ? but the takeover of Welsh utility Hyder by Western Power Distribution (WPD) this month comes pretty close.

The deal has dominated the financial press for months; descending as it did from a straightforward accepted bid to total undignified chaos. The fallout from the fiasco will be felt for some time to come as blame for its conduct is frantically shifted around. Who ends up with the egg on their face is a matter of some dispute.

The story begins back in December last year, when Hyder's announcement that it is conducting a ?strategic review? immediately generated a round of bidding rumours. The company itself has the Welsh regional regulated monopoly for water and sewage (Dwr Cymru) and electricity distribution (Swalec). Hyder made profits after tax of £75 million on a turnover of around £780 million for the year to March 31, and was a prime candidate for a takeover. It's acquisition of Swalec has severely weakened its debt-service protection measures and Dwr Cymru's extensive capital expenditure programme has left the group with a cash shortfall. Net debt at Hyder has risen to £1.9 billion since it purchased Swalec in 1996. It is also operating in an industry that has been targeted by UK government regulators for reform following widespread hostility to price hikes and mismanagement since privatisation. Both the water and electricity sectors will be required to set lower tariffs while investing heavily in new infrastructure. Hyder was advised on its sell-off by Dresdner Kleinwort Benson.

Enter Nomura's Principal Finance Group, headed up by the flamboyant Guy Hands, which has a strong and deserved reputation for turning underperforming companies around. Hyder had all the ingredients required for a principal finance deal, and Nomura agreed a bid with the company of 260p a share on April 18. It was advised on the deal by UBS Warburg. The deal valued Hyder at £402 million and was made through special-purpose company St David Capital. Unlike many other Nomura principal finance deals, the business plan did not incorporate securitisation of receivables (in this case, regulated utility revenue). It also did not undertake to buy back any existing debt. Nomura's bid is likely to have been politically unpopular in Wales, as it is likely to have incorporated a fast turnaround and further sale. ?Everybody knows that Nomura was not going to keep the company for 10 years,? says a utilities analyst in London. ?They did their sums and knew what value it could attract.?

Nevertheless, the bid was agreed in April. But the stakes were soon upped with the news in early May that WPD had approached Hyder with a higher offer. WPD is jointly owned by US utilities PPL Corp and Southern Company Inc, and already had an interest in electricity generation in the UK through its subsidiary South West Electricity (SWEC). WPD was advised on the Hyder deal by Schroders. It may have seemed surprising that a company as unloved as Hyder would engender a bidding war, but the attraction for WPD was obvious. ?The incentive for WPD is to be able to combine its electricity distribution business (SWEC) with SWALEC,? explains Jan Willem Plantagie, utilities analyst at Standard and Poor's in London. ?They do not want the water business and will sell it.?

By the end of May, WPD had revealed its hand with an offer for the company of 300p per share. A crucial difference between the bids is that WPD seemed to propose some form of debt restructuring while Nomura didn't. But neither appeared particularly attractive to Hyder, which ? after mulling the two for some weeks ? announced on July 18 that it was considering breaking up the company and selling it off rather than accepting either of the two bids on the table. Whether this was a genuine consideration or a ploy to try and speed the contest to a conclusion is anyone's guess. But if it was it had the desired result as Nomura upped its bid to 320p a share on August 1. Hyder management responded by recommending the bid to shareholders.

As mentioned, Nomura's approach to restructuring the company did not incorporate any concrete plans for debt restructuring. The whole premise of principal finance is to buy, restructure and profitably exit and this is not, therefore, surprising. But it was to cost the Japanese bank dear. The problem was that with no debt restructuring, outstanding Hyder debt would fall to junk bond status. Back in July, Nomura had asked Standard and Poors to produce a report evaluating its post-acquisition proposals which was released, with Nomura's permission, at the beginning of August. Standard and Poors estimated that if the Nomura bid was successful Hyder's ratings would fall an entire category from A- to BBB- and its debt rating would fall to sub-investment grade BB+ from BBB+. This prompted an outcry from Hyder's existing debt-holders and did considerable damage to Nomura's chances. Ironically, however, immediately following WPD's eventually successful bid for Hyder, Standard and Poor's downgraded Hyder's long- and short-term ratings to BBB- anyway.

WPD swiftly countered the Nomura bid with an offer of 340p a share, and by August 7 Hyder management ? changing horses faster than John Wayne ? announced that they were backing the WPD bid. In addition to the issue of debt restructuring (WPD's bid incorporated a clear commitment to buy back Hyder's bonds if it was successful), WPD's chances had been greatly helped by trade and industry secretary Stephen Byers' decision not to refer its bid to the competition commission. Nomura had been helped by concerns that WPD's plans to contract out Hyder's water business to United Utilities (another privatised UK water utility) would raise competition concerns, but Byers' statement removed this obstacle to WPD. WPD's bid incorporated the likely break-up of the company ? which is also politically very unpopular ? but it now appeared the more palatable of the two. ?WPD always had a different perspective than Nomura,? says Mike Wilkins, head of utilties at Standard and Poors. ?It wanted SWALEC and therefore placed a priority on keeping the bondholders [who could vote against it] sweet.? But despite the fact that Hyder was now backing WPD, Nomura immediately offered 360p a share.

It was at this point that the Takeover Panel, the UK's self-regulating watchdog, stepped into the fray and asked both parties to submit sealed bids for the company by 1.00pm on Friday, August 11. Why they did this is one of the crucial questions that is now being asked. ?Hyder might have been urging them to resolve the dispute,? muses one UK analyst. ?The management might have wanted it as Hyder is rapidly running out of money.? Sealed bids have only been resorted to twice in recent UK corporate history, and in both cases the takeover disputes were resolved without the parties having to actually see the process through.

The two cases in question were in 1983 and 1998. In June 1998, Texas Utilities trumped PacifiCorp in the race to buy The Energy Group. Ironically, Guy Hands and Nomura's Principal Finance Group were also involved in that process in its early stages. Pacificorp was advised on its Energy Group bid by Goldman Sachs and Texas Utilities was advised by Lehman Brothers and Merrill Lynch. PacifiCorp had started the bidding in June 1997 at £6.90 per share. Nomura entered the fray in December 1997, backing a ghost UBS/Lehman Brothers bid. Lehman then jumped ship to work with Texas Utilities on their bid. Nomura withdrew when Pacificorp's bid reached £7.65 a share but by March Texas Utilities had bid up to £8.40 a share ? 20p more than PacifiCorp. The Takeover Panel had got involved at this point ? in order to ?ensure a fair and orderly? resolution of the bidding war.

The Takeover Panel wrote to the two bidders suggesting sealed bids ? citing as precedent a 1983 case in which Allianz Versicherung and BAT Industries were bidding for Eagle Star. The 1983 case did not eventually go to sealed bids and nor did the Energy Group case: a form of adapted sealed bidding (whereby each bidder can state in its bid the amount by which it is prepared to top the other's bid) was agreed upon but in the event PacifiCorp pulled out before the scheme was enforced ? having forcefully objected to the bidding procedure.

It is not, therefore, surprising that many felt that Hyder would not really go to sealed bids ? as the process had always been avoided in the past one way or another. But this deal was to make corporate history and did actually go the distance. Nomura lodged its objection to the decision to go to sealed bids and in the event did not raise its 360p per share bid for the company. ?We are very unhappy about what has happened,? said a spokesman for the company prior to bids being submitted. ?We feel it will not deliver fair value for shareholders and wish that the panel had looked at other options.? ?It is unclear whether that parties agreed to sealed bids with the Takeover Panel prior to the process being set in motion,? says Plantagie at Standard and Poors. The Takeover Panel decreed that Hyder would go to the company with the higher bid, but the actual price paid would be a premium of 5p per share above the lower offer. Thus, WPD's sealed bid of 375p was successful, with the winning bid decreed to be 365p a share.

But rather than ensuring a ?fair and orderly? conclusion to this dispute, the fun was only just beginning. Nomura ? not surprisingly ? immediately matched the WPD bid. But the contest descended into chaos when Nomura also lodged an appeal against the decision, stating that WPD had failed to announce its winning bid by the deadline dictated by the Panel, and the result was, therefore invalid. Under the Panel's guidelines, bids were to have been submitted by 1.00pm and the winner announced by 3.30pm ? prior to the market close. WPD missed this 3.30pm deadline. ?The problem for WPD was that Deutsche Bank has a 7.5% stake in the company and had to be formally advised of the bid,? explains one party close to the deal. ?It is our understanding that that process was not complete by the time the deadline arrived.? Whether or not this is the case remains with WPD.

Nomura hoped to exploit this technicality to get the result of the contest overturned. It wanted the contest to be settled by way of best and final offer, saying that this would maximise value for shareholders. By this stage it was late on Friday evening ? and the dispute would have to wait until the following week to be resolved. The weekend press was filled with speculation over the fiasco, and Hyder announced on Sunday 13 that its shares might have to be suspended before the start of trading on Monday while confusion over its fate reigned. However, having reviewed the contest the Takeover Panel announced on Tuesday 16 that the result would stand. There had been some half-hearted speculation in the market that Nomura would push for a judicial review of the process, with some of the wilder speculation running to Nomura taking the Takeover Panel to court. ?Nobody really thinks that Nomura will go to judicial review,? said Bromley at the time, and he was right. Hands conceded defeat the day after the Panel's decision, stating that he ?didn't want to prolong the period of uncertainty for Hyder's shareholders? and that Hyder was always going to be more valuable to someone willing to carry out a break-up strategy, which ?was never our intention.? He doesn't walk away too sore from the experience, though. Nomura's Principal Finance Group will make roughly £30 million from the deal ? partly from the 16.2% stake it has built up in the company and partly from a £4 million fee that Hyder agreed to pay Nomura if it pulled out. It is thus a win/win situation for Hands, and driving up the share price was an excellent strategy even if he initially had no intention of going the distance with WPD at all.

?This was an embarrassing situation for all involved,? says Bromley at Credit Lyonnais. But the party that most definitely has most of the egg on its face is the Takeover Panel. ?The Panel should have let the contest run its course,? says one observer. ?The fact that Nomura did not raise its bid is a strong indication that the process was coming to an end anyway.? Bromley agrees. ?The fact that Nomura didn't raise its bid means that they had reached as far as they were prepared to go.? But Mike Wilkins at Standard and Poor's disagrees. ?From the equity holders' perspective the decision was detrimental to their interests,? he says. ?I an sure there was still 10p to 15p left on the table.? Nomura and WPD had been battling it out for Hyder for around four months, which is not an unprecedented length of time for a takeover dispute. The Takeover Code states that any offer must go unconditional on Day 46 of a bid, but as is common in takeover competitions, the rule had been suspended in this case while Nomura and WPD slugged it out.

The Takeover Panel itself is made up of industry professionals who sit on a voluntary basis. Following the Energy Group confusion and now the Hyder debacle, its future is certainly the subject of much debate. It may be the case that the Panel needs to review its processes as there is almost universal agreement that sealed bids was the wrong way to go. But to heap all the criticism on the Panel's head is unfair. WPD and their advisers, Schroders, made a colossal mistake in missing the Panel's announcement deadline, and Nomura and UBS Warburg were disingenuous to say the least in trying to use this minor technicality to overturn the outcome. But the deal now goes forward, and WPD concluded its promised bond-buyback at the end of August.

But anyone now wishing to draw a line under this sorry episode can think again. In a last minute twist at the end of August, UK water utility Severn Trent mounted a legal challenge to WPD's plan to bring in United Utilities to manage Hyder's water business. Although this issue was not referred to the Competition Commission by Stephen Byers, Severn Trent is demanding that the contract be put out to tender. ?Severn Trent have a valid point,? says Wilkins at Standard and Poors. ?Clear benchmarks [for how the deregulated water market is managed] need to be set down. It is a brave move by them.? How far they get with their challenge is another story. ?They won't frustrate WPD but they might frustrate United Utilities a bit,? says Wilkins. This one looks set to run and run...