Pennon’s acquisition of SES could ‘harm’ Ofwat’s ability to regulate

Pennon Group’s acquisition of SES Water could impede Ofwat’s ability to make comparisons between companies, according to the Competition and Markets Authority (CMA).

The watchdog has suggested the deal, agreed in January, may limit the way Ofwat can carry out its statutory functions.

Consequently, the CMA has escalated its investigation to a Phase 2 review, which will further explore the implications of the takeover.

Pennon, the parent company of South West Water as well as Bournemouth and Bristol, struck a deal to acquire SES Water’s holding company Sumisho Osaka Gas Water UK Limited for £89 million.

The CMA’s initial review of the merger concludes that Ofwat could be limited in its ability to make comparisons between companies if the merger goes ahead.

Specifically, it raises concerns that removing SES from Ofwat’s dataset would reduce the number of comparators available for Ofwat to estimate cost allowances and set service quality targets.

The concerns voiced by the CMA matched those it had when Pennon added Bristol to its group in 2022.

The CMA confirmed that it will refer the transaction for a Phase 2 review, as it did with the Bristol acquisition.

Pennon will provide undertakings to the CMA within the next 10 days to offer assurance that the acquisition would not prejudice or hamper Ofwat’s ability to make comparisons between companies.

The CMA then decides whether to accept the undertakings. It will make a provisional decision within 10 working days and a final decision 50 working days from the phase one decision is published.

Pennon said that “based on its experience of previous merger reviews”, it has accepted that the threshold for the CMA’s referral to Phase 2 of the process may be met in this case.

For the Bristol deal, the undertaking meant maintaining separate price controls for the companies to allow the regulator to benchmark and compare between them.

Pennon chief executive Susan Davy said: “It is important to us that this deal receives the appropriate level of scrutiny so that all of our stakeholders feel reassured of the benefits of the acquisition and have trust in the outcome.

“While the undertakings have not yet been agreed, we have been through this process before with our acquisition of Bristol Water and are confident that we will be able to offer a compelling package of undertakings that will fully address the CMA and Ofwat’s concerns, and ensure that the benefits of the acquisition for all customers and stakeholders are delivered.”

The acquisition is the first Pennon has made that is geographically separate from its current region.

Davy previously told Utility Week that the company remained open to opportunities in the UK. The group has been acquisitive since the disposal of its waste business Viridor in 2020 for £3.7 billion left Pennon with a war chest of £2.5 billion, which Davy said would be spent expanding within the UK water market.

Joel Bamford, executive director of mergers at the CMA, said: “Water services are vital to our day to day lives, whether at home or in the workplace, and we’re concerned that this deal could impact Ofwat’s ability to make comparisons and carry out its role of regulating the water sector.

“We will now carefully consider the solutions put forward by the companies and seek views from Ofwat to determine whether they address our concerns.”