Pennon eyeing UK-wide acquisitions after Viridor sale

Pennon, the parent company of South West Water and Bournemouth Water, is understood to be considering its next acquisition of a water or wastewater business once the sale of waste management business Viridor is completed.

Utility Week spoke to chief executive Chris Loughlin and chief financial officer, Susan Davy, on the back of the company’s full-year results, in which they also launched a new dividend policy. This will see dividends grow each year by CPIH plus 2 per cent real growth, which Loughlin described as “sector leading”.

Pennon said that after the £4.2 billion sale of the Viridor business it would use the circa £3.7 billion of net cash proceeds to reduce company borrowings and pension deficit as well as making a return for shareholders and retain some funds for future opportunities.

Analysts have suggested that after such deductions the company would have a war chest of circa £2.5 billlion for an acquisition, and could borrow more to bolster resources. Northumbrian Water has been mooted as a potential target for a “transformative” deal if owner CKI is willing to sell.

Pennon ruled out expansion beyond regulated water and wastewater sector, or opportunities outside of the UK, but acknowledged that such opportunities were not plentiful.

Following the sale of Viridor, Pennon could drop out of the FTSE 100 as its value would be £2.4 billion. This is another reason cited by analysts to consider a larger acquisition.

Pennon’s chief executive Chris Loughlin said that since the successful acquisition of Bournemouth Water in 2016, the business had continued to track opportunities for further growth.

He said the systems and technology used to run Bournemouth Water from South West’s headquarters in Exeter mean the business would not be limited geographically when considering an acquisition.

“We think consolidation brings benefits as we proved with the acquisition of Bournemouth in 2016 that brought benefits to both companies and customers in both regions,” Susan Davy chief financial officer said.

These benefits include two new wastewater treatment plants for the Bournemouth area that may not have gone ahead if it had not been for the acquisition.

The sale of Viridor has been approved by shareholders and received clearance from the European Commission merger and is expected to complete in early summer.

Aside from growth opportunities, the company reported strong results moving into the new investment cycle with liquidity of £1.6 billion, prior to the receipt of proceeds from the sale of Viridor, to weather ongoing uncertainty.

It said performance across all business parts has been in line with expectations and, despite the impact of coronavirus, remained resilient.

The company reported experiencing “no real impact” in terms of expenditure related to the current crisis – with only £9 million expected credit losses, mostly in its non-household business – Pennon Water Services, which expected credit losses of £5 million compared to £3 million for South West Water and £1 million for Viridor.

During lockdown there has been a shift in water demand with household usage rising between 5 – 8 per cent and a complementary reduction in the non-household market of about 20 per cent, which the company anticipates will begin to ramp-up as lockdown restrictions ease.

On the non-household market, Loughlin said Pennon Water Services has not had to use the support mechanisms offered by MOSL and Ofwat to support retailers and wholesalers during lockdown.

“It is a very difficult market and the margins are very thin with even the more established larger players finding it difficult to cope with current crisis,” Loughlin told Utility Week. “We have worked hard to be cost efficient and to grow our market share by numbers of connections. It is a very cash driven business so looking after cash and cash collection has been important.”

“There cannot be a silver lining to something as serious as coronavirus, but perhaps Ofwat and MOSL will take a look at the model and make sure it is as resilient and strong as they would have hoped it to be. They put in place special support mechanisms to tide the market over in a difficult situation, but I’m sure they will take the opportunity to reflect on the longer-term implications both for retailers and wholesalers.”

The company decided early that all staff would receive full salary – regardless of situation – throughout lockdown and without using any government support schemes. Loughlin said for a company with good liquidity and funding in place it was “inappropriate to use those mechanisms”.

The company outperformed on several metrics in the 2015-20 investment cycle earning £297 million in totex out performance targets. It said it anticipated similar performance in the current five year cycle.