Utility Week

Utility Week 23 06 17

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UTILITY WEEK | 23RD - 29TH JUNE 2017 | 19 Finance & Investment Analysis C astle Water has made no secret of its quest for acquisitive growth in the non- domestic water retail markets of both Scotland and England. The company's latest buy is its Scottish peer Cobalt Water – which it purchased for an undisclosed sum. The acquisition adds Cobalt's 7,600 Scottish supply points to Cas- tle's 11,500 Scottish supply points. The deal will allow Castle to "accelerate its growth in Scotland", chief executive John Reynolds tells Utility Week. Although Cobalt will lose its brand iden- tity – essentially becoming "Castle Water Scotland" – its offices will remain open. Current managing director Scott Macleod will become managing director – Scotland, and commercial director Hugh Brown will become sales director – Scotland. And, Reynolds says, its workforce will grow. The deal, then, looks set to benefit both parties. "We've known Cobalt for quite a while, and we think that they are very capable," says Reynolds. "I think they saw the sense in being part of a larger group that wants to stay with that culture of an independent retailer. We wanted to expand our capability within Scotland further. It's a fit where there are some significant strategic advantages but no redundancies. "We've got some specialist areas of activ- ity such as farms and charities which will continue to be looked aer by the same people," he explains. "The invoicing, where we've got complex consolidated invoicing, will carry on with the same group of peo- ple, because they're doing the consolidated invoicing for customers in England as well. "What you end up with is a slightly differ- ent kind of segmentation than just regional between Scotland and England. The split becomes customers who are national across England and Scotland, and the customers who are just Scottish in some areas." Conquering the market Cobalt Water is not Castle's first purchase. The company wasted no time in acquiring the business customers of the first company to exit the English non-household market – Portsmouth Water – at the beginning of 2016 for £2.9 million. The deal not only allowed Castle to quickly become an active market participant south of the border, it also played to Portsmouth's advantage. Portsmouth's business customers repre- sented just 5 per cent of its customers – and just 1.6 per cent of retail revenue. This, man- aging director Neville Smith said, meant that "huge investment" would have been needed to be successful in the new market. It was a bridge too far. But though Castle Water's acquisition of Portsmouth alerted the market to its bull- ish ambitions in England, few expected its next, more eyebrow-raising, move. In July last year, it successfully struck a deal with Thames Water to buy its extensive business customer base for £99 million. This stunning acquisition took Castle's customer base from about 30,000 to 330,000 overnight and made it the second-largest retailer in the English market. For Thames, the deal allowed the company to "concen- trate on its core regional household busi- ness", former chief executive Martin Baggs told Utility Week. Since the market opened at the begin- ning of April, Castle has also enjoyed gen- tler organic growth, attracting customers from across "all the different sectors of the market", Reynolds says. "We've picked up customers in SMEs, public sector, large man- ufacturing and large multi-sites. We've been active in multi-regions and across all the dif- ferent segments in the market." The market is still in its early stages and we will not know how customers view retail- ers until the first complaints data is pub- lished by the Consumer Council for Water and Ofwat. However, other market players have identified difficulties for any company trying to "be huge and act small". Speaking to Utility Week for a forthcom- ing interview, Helen Gillett, managing direc- tor of Affinity for Business, set out her belief that variety is key to a well-functioning mar- ket, but: "There is a value in knowing your region, knowing the customers, sharing the economy, sharing an objective around that economic growth... I don't know that big is beautiful." Meanwhile, examples from other sectors show that rapid growth can come at a cost. As companies scale up, they oen struggle to maintain service and can easily become divorced from customer experience. You only have to look at Citizens Advice's performance data for energy sup- pliers – where companies such as Scottish Power and Npower generally score low – to conclude that big isn't necessarily best. At fellow big six supplier Eon – which performs relatively strongly in complaints handling leagues and sat- isfaction indexes – former chief exec- utive Tony Cocker recently told Utility Week it is a constant struggle to maintain "empathy" and not to become "faceless". Meanwhile, independent Extra Energy, which has been the complaints laggard for a number of quarters, said the reason for its poor complaints record is that it "failed to anticipate just how attractive our low prices would be to householders, and unfortunately we didn't put customer service resource in place quickly enough". Start-ups in other sectors, such as Uber, which have experienced rapid growth have seen their initial shiny reputations tarnish with growth. So, should Castle Water bring an end to its acquisitive campaign to conquer the English and Scottish water retail markets? Reynolds shows no inclination to make peace. Castle will "continue to evaluate large opportuni- ties" in both Scotland and England, he says. Helen Gillet's interview with Utility Week will be available in the next issue. Castle the conqueror Business supplier Castle Water's latest purchase is its Scottish peer Cobalt Water. But can it retain its small company ethos as it pursues further aggressive growth? Lois Vallely reports. "We've known Cobalt for a while, and we think they are very capable. I think they saw the sense in being part of a larger group that wants to stay with that culture of an independent retailer"

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