Analysis: Dee Valley in demand

Severn Trent thought its Dee Valley Water takeover was in the bag – and then along came a rival bidder in Ancala. Lois Vallely looks at a good old-fashioned bidding war.

On 16 November, Severn Trent jubilantly announced its acquisition of Dee Valley Water – a “natural fit” with its existing business. But before celebrations could get under way, it became clear that the deal was far from finalised. In came investment firm Ancala with a Rival bid, forcing Severn Trent to trump it to remain in the game. What has led to this spirited bidding war? And who will be victorious?

Each company claims it is the more suitable buyer for Dee Valley and its customers. Ancala says that under its ownership, Dee Valley will “continue to be a local company” run by staff situated locally. Meanwhile, Severn Trent says it will “enhance the current service offering for Dee Valley’s customers” by extending support for vulnerable customers and sharing half of any wholesale cost efficiencies achieved with customers through their bills.

Why are both companies so set on acquiring Dee Valley? The company’s chief executive Ian Plenderleith tells Utility Week all four offers the company has received in the past month have been “entirely unsolicited”. “Severn Trent approached us first,” he says. “We signed an NDA [non-disclosure agreement] with Severn Trent in early July and with Ancala in early October.”

Dee Valley is stock-market-listed and wholly owned by shareholders, the largest of which is insurance firm Axa, which owns a 26 per cent stake.

Plenderleith says: “Regulators and the potential purchasers have understood the significant improvements in Dee Valley Water’s customer and operational performance over the last couple of years. We have become one of the better-performing companies, and in some cases the best-performing, in the sector.

“I am sure the current financial environment makes us – a well-performing company within a stable regulatory environment – an attractive proposition.”

Analysts agree. Frost & Sullivan vice president of environment and water, Fredrick Royan tells Utility Week the UK water utilities are a “safe bet” for investors.

Severn Trent says Dee Valley’s proximity is what makes it particularly attractive, as the two companies share a border. Severn Trent chief executive Liv Garfield tells Utility Week: “It has got many similarities. It’s got the lowest water bills, we have got the lowest combined bills; it’s got a similar strong customer focus, and we think it is culturally a strong match.

“We believe that we’ve got experience and strong operational performance, and that we could share that with the Dee Valley customers to give a much better customer experience. That is why we are keen.”

Ancala did not respond to Utility Week’s request for comment. However, at the time the investment firm put in its first bid, managing partner Spence Clunie said: “Ancala views Dee Valley as a well-run and efficient water-only company that fits with the investment characteristics of Ancala’s mandate.”

It added that, under the chairmanship of Jon Schofield and since the appointment of Ian Plenderleith as chief executive, the business has made “impressive improvements” in financial performance and customer care while ensuring that customer charges are the fourth lowest in England and Wales.

Despite these successes, however, Royan speculates that Dee Valley might expect some significant restructuring if Ancala takes the helm – certainly more so than if Severn Trent wins out.

Royan adds that the conclusion of the Dee Valley acquisition may just be the beginning of a flurry of similar deals across the sector. “There are still existing opportunities for consolidation in the UK water utility industry,” he tells Utility Week, and this will be a “key trend” in the coming months and years.

PwC UK water sector leader Richard Laikin agrees, telling Utility Week: “This is another transaction that continues a long-standing trend of consolidation in the sector, the previous example being South West Water/ Bournemouth, and so is unlikely to be the last.”

And analysts at financial services company UBS published a note following the original acquisition notice saying it believes that the UK water sector is “set for further consolidation as larger and more efficient companies take over smaller ones”.

“This should be triggered by continuing regulatory returns tightness and increasing pressure from the regulator for the companies to improve operational efficiency and customer service,” they said.

At the time of going to press, we do not know who the winner will be. Unless Ancala comes back with a higher offer, which Royan says is unlikely, it will be Severn Trent which emerges victorious – kick-starting water utility consolidation.

The bidding story so far

On 16 November, Severn Trent announced it would buy rival water company Dee Valley in a deal worth £78.5 million. Severn Trent said Dee Valley, which supplies approximately 62 million litres per day to more than 258,000 customers, was a “natural fit” as the two companies operate in neighbouring areas in England and Wales.

However, that was not the end of the story. The following week – after close on Tuesday 22 November – Severn Trent was outbid by Ancala, which it had previously overtaken in the race. Ancala made a bid of 1,706 pence per share – a 1 pence increase on Severn Trent’s offer.

After close on Wednesday 23 November, Severn Trent put in another bid of 1,825 pence per share. The revised acquisition values Dee Valley at approximately £84 million.

The latest offer from Severn Trent, Plenderleith says, now has the recommendation of the board of Dee Valley, and all previous recommendations have been withdrawn and replaced with this recommendation.