Recasting Pennon Group

With the acquisition of Bournemouth Water – and to better prepare for non-domestic competition – Pennon Group has restructured its businesses. Mathew Beech looks at its plans.

The Pennon Group restructure announced last month is more of an evolution than a revolution. The changes appear, on the surface at least, to be relatively subtle.

Group chief executive Chris Loughlin admitted as much. “It isn’t a particularly new strategy but there are some new nuances,” he said at a capital markets day last week.

Pennon is the parent company of the waste and resource business Viridor, and of the water companies South West Water and Bournemouth Water, with the latter being bought into the group in April 2015 following a £100.3 million takeover.

The FTSE250 company has £5.8 billion of assets and employs more than 4,500 people across the three enterprises. The restructure aims at becoming a leaner, more efficient organisation, and keeping shareholders happy, with good levels of returns. Loughlin has set an ambitious dividend of RPI+4 per cent. The restructure is costing Pennon £8 million. The company is expected to reap rewards of £11 million a year after two years.

Before the restructure and strategy review, the Pennon management treated the South West Water and Viridor businesses as entirely separate entities. Now there is a recognition of an overlap between the portfolios. Group chairman Sir John Parker says the aim has been to “streamline by removing layers, therefore improving governance and allowing faster decision making”.

The old structure had separate boards and non-executive directors for Viridor and South West Water, with no group chief executive overseeing the company’s two divisions. The new structure removes the doubling up of decisions that was taking place.

The number of shared services within the Pennon Group will increase, with HR, procurement and IT being some of the elements that are set to be centralised, although the final plans are still to be confirmed.

The integration of Bournemouth Water into South West Water, and the Pennon Group as a whole, is also well underway and expected to be completed by the end of this financial year. Loughlin said this will include reducing the cost base at Bournemouth Water by a quarter, to “take the cost out” of that company, and using shared services. This will enable Pennon to deliver “greater totex outperformance” at South West Water than the £29 million South West achieved in the first half of 2015/16.

Alongside the drive to be more cost efficient and deliver greater returns to investors, reshuffling the Pennon pack has been conducted with one eye on the imminent opening of the non-domestic water market, alongside the amalgamation of Bournemouth Water.

A separate legal entity has been created, under the moniker Pennon Water Services, which will house the non-domestic retail businesses – Source for Business, Avon Valley Water, South West Water Business Services, Bournemouth Water Services, and Aquacare. The wholesale and domestic retail arms of both South West Water and Bournemouth Water continue to be housed under the South West Water arm of the company.

While the changes in the company’s strategy are “nuanced” and the overall structure not a significant departure from that which went before, they are aimed at future proofing the company and building on its current strong foundation.

As group chairman Parker said, it is about making “the new Pennon even leaner, more nimble and more able to capitalise on opportunities.”

Read a Q&A with Pennon group chief executive Chris Loughlin here.

For an analsysis from Nigel Hawkins on the restructure, click here.