Severn Trent and United Utilities ally: the dawn of a new era?

Two of the UK’s largest water companies have announced they will join forces for the non-household retail market. Does this mark the beginning of a new era in the water sector?

Ever since competition in the non-domestic water market was first mooted, the industry has been eager to see what will happen as companies ready themselves for the opening of the market – who will stay and compete, and who will go. The closer the sector gets to the opening of the market, and with every announcement, the question becomes ever more prominent in people’s minds.

In January a ripple of excitement passed through the industry, as Portsmouth Water became the first to reveal that it would exit the business retail market when competition is introduced next year, handing the baton to Scottish supplier, Castle Water. The latest announcement has created more of a wave than a ripple, as last week Severn Trent Water and United Utilities (UU) stated their intention to team up and create a new, separate, and yet-to-be-named retail business.

The feeling in the industry is that this joint venture (JV) – ‘United Trent’, if you will – is a positive move, not just for the two companies involved, but for the wider water sector as well, having paved the way for similar deals amongst other water and sewerage companies (WASCs). Certainly, if the CMA doesn’t give it the go-ahead, this would be a clear signal that such endeavours are not acceptable. UU chief executive Steve Mogford says it is a “logical step to provide a strong platform in the new competitive market”. “By creating an exciting new standalone company, we will be well place in the English and Scottish competitive markets,” he adds.

The decision was not solely based on location, although sharing a border carries obvious benefits – the office of the new business will be based in Stoke-on-Trent, roughly equidistant from Severn Trent’s offices in Birmingham and Coventry, and UU’s office in Warrington. Scale was also a major factor, as was mindset. “Our view is that scale is a benefit to address overall cost base and therefore competitiveness,” Mogford says. “With Severn Trent, we found an organisation that’s clearly likeminded in seeking the market opportunity.”

Severn Trent will pay £3.5 million on completion of the transaction, and will share the cost of systems development. It will use the customer relationship management system (CRM) that UU has developed. The JV will offer value added services to the combined customer base, such as water efficiency advice and combating leakage on customers’ sites, although “long cycle” services, such as the construction and operation of assets, will remain the responsibility of UU and Severn Trent individually.

Based on the two companies’ accounts, the JV would have had sales of £940.2 million, gross assets of £200 million and profit before tax of £9.7 million for the year ended 31 March 2015.

Combined, the companies hold about 26 per cent of the market share across England and Scotland – in the form of around 400,000 businesses. UU business director Sue Amies-King, who will be chief executive of the new business, has refused to comment on its target for growth. However, key to keeping its current customer base, and building on that, will be to get the branding right. But the intricacies of the new business are currently being thrashed out, and work on the branding is unlikely to begin in earnest until the CMA has made its decision.

Of the water-only companies (WOCS), Affinity Water, Bristol Water, Essex and Suffolk Water, Sutton and East Surrey Water and Cholderton and District Water all tell Utility Week they plan to remain in the market, with South East Water and Cambridge/South Staffordshire Water refusing to comment. And of the WASCs, eight of nine say they will not exit the retail market, with Southern Water saying it is “undecided”.

So what happens now?  Other WASCs may choose to follow in the footsteps of UU and Severn Trent. Other WOCs may emulate Portsmouth, and exit, or Bristol, and join a WASC. Whitman Howard analyst Angelos Anastasiou suggests further alliances are “certainly feasible”, and, although this will probably be in the form of a WASC taking over a WOC – as was the case with South West Water and Bournemouth – more WASC/WASC deals are also likely, as long as there are benefits for customers.

Whatever happens, market opening is inching ever closer, and companies without fully formed programmes now are likely to find it difficult to be ready in time.