Market view: Castle Water and the water market

There’s a lot of talk about “disruption” in just about every industry sector at the moment.

Normally that brings to mind Uber shaking up the taxi market, or Deliveroo shaking up your lasagne on the back of a scooter. But can the water market have disruptors?

In the sense of tech-based, left field start-ups with a blockbuster idea, it seems unlikely: the barriers to entry are pretty high, the sector is heavily regulated, and competing against well-established competitors is probably enough to deter all but the most optimistic, well-resourced and capable.

But the non-domestic retail market in England is a prized market. Opening that to competition could be disruptive in itself for all kinds of reasons, so for new competitors to enter they need a good plan and a sound business model.

Enter Castle Water. Regular readers will know it agreed a deal in December 2015 to acquire the non-household customer book of Portsmouth Water, and repeated the move in agreeing the ambitious takeover of Thames Water’s non-household retail portfolio last month. This is a big move.

There is no hiding the company’s intent, and I was fortunate to advise Castle Water on both deals. The Portsmouth deal was the first of its kind in the market (even if, technically, there’s no market to speak of yet), which made it challenging from a legal perspective. With most acquisitions, there’s a document for a similar previous deal which can be tailored to the details of the new deal. In a non-domestic water market which hasn’t yet opened, there is no precedent.

The Thames deal worked because there were two parties with a shared goal: the smooth transfer of Thames’s non-household retail book to Castle Water. Sounds simple enough, but executing the plan on that scale was complex. For others looking to acquire their way into the market, there are a few things to bear in mind.

Until the market officially opens, no-one can exit and no new entrants can participate. But jumping in on day one to service thousands of customers won’t end well for anyone, so the novel approach that Castle Water has developed is a two-stage process involving initial outsourcing and ultimately the transfer of the business when the market opens via a statutory transfer scheme; in other words, the mechanism which legally transfers the non-household retail customer book to, in this case, Castle Water.

Getting the moving parts in place for both of those processes to happen smoothly relies on both parties working closely together, not to mention the respective legal teams. In the deal with Thames we were able to effectively use and leverage our experience gained in executing the Portsmouth deal for Castle Water. This not only made this a more straightforward and efficient process with Thames, but also enabled us to close the deal with Thames in a rapid timeframe after initial heads of terms had been signed. Bear in mind too some of the risks. The regulations which effect English market opening were in draft form throughout the deal process.

While the regulations were busy working their way through parliament, we were busy mitigating the risk contractually for Castle Water that the regulations never made it through the other side at all. The fluid nature of the regulatory landscape was one of the biggest challenges here, but one that we were in a strong position to tackle having assisted Castle Water on its earlier deal with Portsmouth.

Although the regulations have now been made, there is still the small matter of the market actually opening, and any deal where market circumstances could materially change needs to include some provision of risk and a robust plan B if the unlikely or unexpected happens. Ensuring the contractual position in any deal provides for an amicable divorce with clear lines around payments and allocation of responsibilities if we suddenly face a government U-turn on the market opening up to competition is essential, not only for the parties to the deal, but for customers too.

With any deal, each side should conduct proper diligence, and in the case of the acquisition of non-household retail customers, proper scrutiny of vendors, data and customers are sensible measures to ensure things can progress without unnecessary delay.

It’s undoubtedly an exciting time for the English non-household retail market. Scotland’s experience has been eventful, and Business Stream is now stretching its legs into England with its purchase of Southern Water. Acquisitions and further consolidation are likely to be a feature up to and probably for some time after the market opens in April 2017. By approaching deals the right way, retailers can be the water market’s version of the much-vaunted disruptors – and for the right reasons.