Ofwat sending ‘mixed signals’ on M&A

Ofwat is sending out “mixed signals” about its position on mergers and acquisitions (M&A) within the UK water sector and could be dissuading investors from potential deals, analysts have warned.

Analysts have questioned the regulator’s openness to mergers following its submission to the Competition and Markets Authority (CMA) inquiry into the Bournemouth Water-Pennon deal, where it raised concerns about the loss of a comparator company.

The regulator supported the takeover in its evidence – but stated it could cost up to £119 million in lost efficiencies across the sector by 2025, unless mitigating remedies were put in place.

Whitman Howard analyst Angelos Anastasiou told Utility Week: “[Ofwat chairman] Jonson Cox indicated he would be content with mergers happening with some of the businesses.

“But the actual input they gave to the Bournemouth Water takeover inquiry was a little bit less positive and a bit more reticent about them and the loss of comparators. We’re seeing slightly mixed signals from Ofwat.”

Anastasiou added that as a result, any further activity in the sector is likely to come from overseas investors buying into existing companies, rather than another merger. He added that sovereign wealth funds from the Middle East and Asia are the most likely to invest.

RBC Capital analyst Maurice Choy agreed: “When a company thinks about consolidation, they don’t think first about the money, they first think about whether Ofwat will allow it. That is one of the biggest barriers people need to consider.

“Right now, Ofwat appears to be a little unclear about where they stand on M&A.”

At the end of last year, Cox opened the door to “radical” restructuring of the water market, calling for “dynamic and differentiated” approaches to any merger and acquisition activity that follows the conclusion of PR14.

Ofwat said it remains open to mergers in the sector but that it would ensure it is still able to regulate effectively and make comparisons between the companies as well.