Ofwat to reduce barriers to water company M&A

Ofwat has opened a consultation on fresh rules which could reduce the barriers to water companies merging, as long as it is to the benefit of customers.

The consultation follows changes to the regulation surrounding industry mergers in the Water Act 2014, which gives the regulator greater freedom to assess the impact of a planned merger.

Up until now the Competition and Markets Authority has been responsible for approving mergers within the water sector but Ofwat’s greater oversight could eliminate the need for a full review from the CMA – such as that currently underway for Pennon’s acquisition of Bournemouth Water.

Ofwat has signalled increasing openness to mergers among water companies over the past 12 months. Late last year, chairman Jonson Cox called for “dynamic and differentiated” deals as the industry changes shape following PR14, and in anticipation of market opening in 2017.

Ofwat’s senior director of finance and networks Keith Mason said: “We welcome the changes to the rules on water mergers in the Water Act 2014. Our increased role at an early stage in the process will provide greater certainty around potential mergers and reduce the burden on mergers which provide benefits to customers. Yet it still ensures that customers remain protected where this is not the case.”

The move was welcomed by investors who are increasingly focused on M&A in the water sector following the recent conclusion of the PR14 regulatory determinations.

“Any softening of its stance to mergers has to be seen as a positive for a sector where M&A remains a key theme,” said an investor note from RBC Capital.

Ofwat has set out its principles and approach to assessing mergers, including how it will assess the impact on its ability to make comparisons, to which the industry is urged to respond