Leader: Water sector under starter’s orders

Congratulations to South West Water. Its parent company, Pennon, this week pulled off the acquisition of Bournemouth Water in a deal that fires the starting pistol on the long-awaited M&A in the water sector.

For Pennon/South West, it’s a sweet deal. Bournemouth is recognised as a leading municipal water company with a strong local brand and a book of non-household business that complements South West’s mainly SME customer base at a pivotal moment in the run-up to market opening. The deal signals South West’s intent to be a serious player in the non-household market, and suggests that the big boys such as Thames and Anglian won’t have it all their way.

South West Water will be looking to capitalise on the Bournemouth brand, and that at least is likely to survive the deal. Once the acquisition has passed the CMA – a hurdle that could take up to six months to clear – Pennon will have some tough choices to make about how it maximises the potential for efficiencies from the takeover.

More deals will follow as the water sector reshapes itself ahead of market opening, and in recognition of the tough new approach to risk and reward under AMP6. Some investors, like Bournemouth’s previous owner Sembcorp, will retreat while others, like Pennon, will advance. In some cases, a split between investors focused on the traditional, asset-based, regulated wholesale business and those willing to chance their arm in the retail market will emerge, and this may drive less traditional takeovers. As Ofwat chairman Jonson Cox said earlier this year, who says an acquisition has to be a simple case of a big company swallowing a smaller one whole?

There is one deal that the market awaits with particular eagerness. The first acquisition of a book of non-household businesses will signal the development of a market for customers, and give an indication of price. For those companies looking to exit the non-household retail market, that will be a crucial moment. Ofwat is expected to publish a consultation this spring on exit and licensing arrangements that should bring such a deal a step closer.