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Pennon mega-deal for Sutton and East Surrey Water facing competition probe

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England’s water system made a splash again this week, hitting the headlines as the government announced their latest move to - as they put it - clean up the industry.
England’s water system made a splash again this week, hitting the headlines as the government announced their latest move to - as they put it - clean up the industry.

A probe has been launched into Pennon Group’s water mega-deal for Sutton and East Surrey (SES) Water by the Competition and Markets Authority.

According to a government update released today, the CMA believes it has sufficient information relating to the buy to begin an investigation into whether the merger of the companies, announced in January this year, is “likely to prejudice Ofwat’s ability” to compare water enterprises.

Pennon paid £89m for equity, but the total enterprise value of the deal was £380m owing to a net debt pile at SES standing at £391m.

FTSE 250-listed Pennon also owns South West Water, Bristol Water and Bournemouth Water.

The CMA also issued a preliminary ‘invitation to comment’ alongside the notification of investigation, designed to allow parties to submit thoughts on if the deal impacts water regulation in Wales.

This consultation period will run from 8th March until the 7th May when the CMA will decide whether or not to progress the merger deal to a full investigation in phase 2 and until the situation has resolved, the deal will not complete.

The deal added more than 750,000 customers across London, Surrey, West Sussex and Kent to Pennon’s footprint and estimates found that it was likely to boost its regulatory capital value by seven per cent to an estimated £351m.

At the time of the deal, RBC Europe analyst Alexander Wheeler said the move was driven by an “attractive asset price” given forward growth prospects.

The UK water industry continues to be dominated by bills hikes, government scrutiny, growing debt piles and operational failures.

But investors in many firms continued to be rewarded despite the poor performance.

Just before the SES deal closed, Pennon Group reported a pre-tax loss of £8.5m for the year ending March 31 last year but raised its dividend by 10.9 per cent to £112m.

 An Ofwat spokesperson said: “Water mergers are subject to a special merger regime, referred to and decided upon by the CMA. We have a statutory role during Phase 1 to provide an opinion to the CMA on certain aspects of the merger, which we will do in due course.”