Pennon acquires Sutton and East Surrey Water for £89m to expand southern England footprint
Pennon Group has acquired Sutton and East Surrey (SES) Water and other ancillary businesses from its holding company for £89m to expand its operations across the country.
The total enterprise value of the deal is £380m when accounting for SES Water’s net debt of £291m, Pennon said.
SES Water, owned by Japanese firm Sumitomo and Osaka Gas, was one of four firms that water regulator Ofwat said in October needed to deliver a turnaround in their financial performance.
The deal must still be approved by the Competition and Markets Authority, with input from Ofwat.
Privately-owned water companies in England and Wales are facing mounting criticism over leaks, pollution and poor infrastructure.
Pennon also announced its intention to issue a new £180m equity capital raise on the back of the takeover “in order to ensure that the pro forma leverage and capital structure for the enlarged group following the acquisition remains consistent with Pennon’s well-established water business gearing range of 55 to 65 per cent”.
The deal will add more than 750,000 customers across London, Surrey, West Sussex and Kent to the FTSE 250 company’s group and boost its regulatory capital value by seven per cent to an estimated £351m.
Pennon, which already owns South West Water, said the takeover would further its existing water operations, following its previous acquisitions of two water firms, including Bristol Water in 2021.
SES Water customers will be given the chance to join Pennon’s WaterShare+ scheme, where customers are once a year offered the opportunity to become shareholders in the group. If they do not take the shares, they get the money off their next bill.
Pennon expected the deal to be earnings accretive from the first year of full ownership between 2024 and 2025, with a run rate of £11m per year.
Susan Davy, chief executive of Pennon, said: “The business is a proven, high-quality water operation. We are particularly impressed by the innovation and technology-led solutions implemented by SES Water.
“As part of the Pennon Group, we will enhance SES Water’s financial resilience and better position the business to serve its customers and all stakeholders, as has proven to be the case with our acquisitions of Bournemouth Water and Bristol Water.”
RBC Europe analyst Alexander Wheeler said the buy made sense as a strategic fit.
“As a water only business, SES is not subject to some of the pressures in the media on wastewater, whilst the price of the asset looks attractive given the growth of the asset going forward and inflation linkage,” he added.
The buy comes after some recently turbulent times for Pennon and the wider water industry.
For its own part, Pennon reported a 90 per cent year-on-year profit drop for the first six months of the 2023-24 financial year but still paid out a dividend based on positive outlook.
The Financial Times had reported last February that SES Water’s Japanese owners were paying a £7.8m dividend and auctioning the business.