Utility Week - authoritative, impartial and essential reading for senior people within utilities, regulators and government
Issue link: https://fhpublishing.uberflip.com/i/628815
UTILITY WEEK | 22nd - 28Th JanUarY 2016 | 23 Finance & Investment Analysis S ince regulator Ofwat signalled a shi in stance towards mergers and acquisi- tions (M&A) in March 2015, the way has been paved for deals between water firms. Analysts say the amalgamation of smaller water firms would save operating costs, meaning cheaper bills for customers. Angelos Anastasiou, utilities analyst at Whitman Howard, tells Utility Week further consolidation is "certainly feasible". "It will probably be another Wasc [water and sewerage company] taking over a Woc [water-only company], as with South West Water [SWW] and Bournemouth," he says, "although Ofwat has indicated vaguely that it would perhaps be more open to Wasc/ Wasc mergers if there were benefits for customers." There are currently 12 Wocs, five of which are owned by Wascs "or similar", he adds. Bristol Water is partly owned by Spanish water firm Aguas de Barcelona (Agbar); Hartlepool Water is owned by Anglian; Bournemouth by Pennon; Essex and Suf- folk Water by Northumbrian; and Cambridge Water by South Staffs Water. Anastasiou believes moves among the remaining seven are the most likely. Addi- tionally, an alternative form of M&A could emerge with the advent of competition. "Here, there could be aggregation of activi- ties, with some companies deciding they just want to stay in the wholesale market, while others want to grow their retail supply activi- ties through acquisition, as well as organi- cally," he says. The Bournemouth/SWW merger was given the final go-ahead by the Competition and Markets Authority (CMA) last November, aer Ofwat raised concerns that it could cost the sector's efficiency drive £119 million by 2025. The regulator has been criticised in the past for sending out "mixed signals" about its position on M&A and dissuading inves- tors from potential deals. However, it is quick to point out that it "did not oppose the [Bournemouth/SWW] deal", stating its prior- ity was to ensure current and future custom- ers in England and Wales remain "properly protected". The Consumer Council for Water (CCWater) said at the time that the loss of Bournemouth Water could affect Ofwat's ability to compare performance and set future price controls. These concerns, however, were assuaged by Pennon, which confirmed it will continue separate regulatory reporting for Bourne- mouth until at least 2020 to "aid Ofwat with comparisons between companies". The merger resulted in an increase in earnings before interest, tax, depreciation and amortisation (Ebitda) for Pennon for the first half of this financial year, despite tighter price controls, with Bournemouth adding £8.6 million. Pennon group chief executive Chris Loughlin (formerly chief executive of SWW) said the firm was pleased to receive the CMA clearance of the acquisition of Bournemouth. "Pennon is now integrating Bournemouth Water into South West Water, delivering significant benefits to customers and share- holders. The combined business is aiming to set the benchmark for efficiency at the next price review," he added. Since privatisation in 1989, mergers involving water companies with a turnover of more than £10 million have automatically been referred for an in-depth investigation to the CMA, which decides whether the deal will make it harder for Ofwat to compare companies' performance. However, the regulator is considering fresh rules to reduce the barriers to water firms merging, as long as it is to the benefit of customers, by eliminating the need for a full review by the CMA. The move was wel- comed by investors, who are increasingly focused on M&A in the water sector follow- ing the conclusion of the PR14 regulatory determinations. "Any soening of its stance on mergers has to be seen as a positive for a sector where M&A remains a key theme," said an investor note from RBC Capital. As Australia's sovereign wealth Future Fund prepares to sell its 23 per cent stake in Southern Water, in what would be the first sig- nificant transfer of equity in the sector since the tougher PR14 came into effect last April, and with large stakes in other Wascs such as Yorkshire Water coming up for sale in the not- too-distant future, infrastructure fund money likely to be spent in the UK water sector could buy stakes in Wascs rather than Wocs. But with Ofwat seemingly for M&A, and with competition in the non-household mar- ket just around the corner, the sector is on the cusp of change, and analysts believe the Wocs will begin to go. Which will be swallowed up next? "We will see," says Anastasiou. Liquid assets look attractive Will the advent of competition and the fact that the regulator is considering new rules to reduce the barriers to water company mergers see the Wascs swallow the Wocs? Lois Vallely investigates. Water-only company oWnership Company Owner Affinity Water Infracapital Partners/ North Haven Infrastructure Partners Bournemouth Water Pennon Group Bristol Water Capstone Infrastructure/Agbar/Itochu Corp Cambridge Water South Staffs Water Cholderton and District Water Cholderton Estate Dee Valley Water Independent Essex and Suffolk Water Northumbrian Water Group Hartlepool Water Anglian Water Portsmouth Water Independent South East Water HDF (UK) Holdings Ltd South Staffs Water Independent Sutton and East Surrey Water Sumitomo Corp