Eon and Ovo: A tale of two deals

The energy market looks set to be changed forever with the news that Ovo Energy, a challenger supplier, has agreed to buy SSE's retail arm for £500 million. Meanwhile a very different deal is taking place, with Eon taking on fellow big six member Npower as part of its acquisition of Innogy. Utility Week contrasts the two different approaches and reactions.

In the space of a week we have seen one company make a bold move towards the future, while another seems to have little idea how to deal with the loss-making business it has reluctantly inherited.

One deal was perhaps a sign of the times and reflected one of the success stories of the sector, the other however reflected to an extent, where things can go drastically wrong.

The first saw challenger supplier Ovo Energy purchase the retail arm of big six incumbent SSE for £500 million.

It is well-known that SSE has long tried to be rid of its retail service to focus on other areas such as networks and renewables. It very nearly did it until the brakes were applied to a proposed merger with Npower last December, it was off the back of this failure that Ovo saw an opportunity.

Yet on the other side of the energy retail coin there was a slightly less glamorous development.

From the very same deal that presented to Ovo a chance to scale up and evolve, Eon acquired rival Npower by default.

Right up until December last year SSE was set to merge with Npower, creating a new energy company complete with its own board.

As a result of the merger falling through, Npower remained part of parent company Innogy and was therefore involved in the transaction which saw Eon acquire the majority of Innogy’s shares, and Npower as a result.

At a press conference in Essen, Germany on Tuesday (17 September) Eon’s chief executive Johannes Teyssen was asked about the timeframe for integrating Npower into the business.

Speaking with little enthusiasm, he said: “That is the job that the Eon/Innogy board members will have to tackle, as soon as we have something to say we will talk. Currently we have looked into the giftbox, it is not very full, so we will have to wait and see.”

Teyssen is also reported to have referred to Npower as an “open wound which bleeds heavily” – certainly not a ringing endorsement.

And who can blame him? It is well-known that Npower is a loss-making business and has been for some time. Suppliers are facing a lot of pressure in terms of margins and Eon will not be relishing the prospect of taking on such a business as Npower.

Compare Teyssen’s response with that of Ovo chief executive Stephen Fitzpatrick:

“This transaction marks a significant moment for the energy industry. SSE and Ovo are a great fit. They share our values on sustainability and serving customers. They’ve built an excellent team that I’m really looking forward to working with.”

Furthermore Eon’s deal almost went completely under the radar. There was curiously little coverage in the media about the implications of Eon acquiring the majority of Innogy’s shares. More curious when you consider the fact that such a deal is set to fundamentally shake up the big six.

Ovo has made a big and bold play and clearly sees the chance to scale up as a major stepping-stone to becoming a supplier of the future. To this end, it last week unveiled plans to halve its customers’ carbon footprints by 2030.

This week’s carbon-reduction announcement follows on from a lot of proactive media from the company regarding its deal with SSE. Eon in contrast has said very little with regards to its deal while Npower has said it would be inappropriate for it to comment, directing enquiries instead to Eon HQ in Germany.

Eon has instead placed more emphasis on how the transaction will affect its other businesses in Europe.

But for the UK, the all-important question remains – what is to be done with Npower? So far, Eon is remaining tight-lipped about what it will do, but the door is open for a number of options.

These could include a potential sale, but this is an option which has already been tried before. Customers could also be integrated into Eon Energy or Npower could be wound up completely. The future remains unclear.

Either way, we can be sure to expect more big developments soon.

Big Six – How big are they?

We all know the big six are big, but how do we calculate just how big they are? Furthermore with the two potential deals in the offing, the big six will soon become the big five. What then will the market look like?

We thought these would be easy enough questions to answer but it has not been straightforward.

There are a number of different metrics for measuring company size. To paraphrase the great Eric Morecambe, we have all the right companies, just not necessarily in the right order.

More often than not the number of customers a company has will be counted towards their size, but some would say this is irrelevant and that customer accounts are important – two different figures.

Yet getting hold of the number of accounts each large energy supplier has is a difficult task.

Even the press office of one supplier, who will remain nameless, was stumped when we approached them, saying they didn’t break down their data into customer accounts.

Yet if we look at the market share of each company, we can make a list of suppliers from the largest to the smallest. Or smallest largest if you will.

After analysing data from Ofgem, automated switching service Look After My Bills put the electricity and gas market shares of suppliers into pie charts.

In the most up to date data of current electricity market shares, British Gas is unsurprisingly ahead of all other suppliers at 19 per cent.

Yet if we consider the recently announced deals that are planned for the market, we start to see a different picture, with Eon taking the top spot, British Gas pushed into second place and Ovo Energy in third.

In terms of electricity market share, this means that ranked largest to smallest, the big five will be:

• Eon (20 per cent)
• British Gas (19 per cent)
• Ovo (18 per cent)
• EDF (11 per cent)
• Scottish Power (10 per cent)

The gas market however is a slightly different beast and British Gas is clearly the gas giant with a 28 per cent share.

Even if the planned acquisitions go ahead, the Centrica-owned energy giant still retains the top spot. Eon moves into second place with a 17 per cent share while Ovo takes third with 15 per cent.

Therefore in terms of gas market share, the big five will be:

• British Gas (28 per cent)
• Eon (17 per cent)
• Ovo (15 per cent)
• EDF and Scottish Power (8 per cent)

Needless to say, it is a statistical minefield.