Severn Trent hunkers down after the PR14 storm

Severn Trent has hunkered down to focus on its core businesses now the PR14 storm has passed; and the new, financially challenging landscape has been revealed.

The price review has been bruising for the water companies, with the weighted average cost of capital falling from 5.1 per cent for the 2010-2015 period, initially to 3.85 per cent at the draft determination stage, and then down further still to 3.74 per cent by the time the final determinations were published by Ofwat.

This will hit the returns water companies, including Severn Trent, are able to make over the next five years, and put a squeeze on their revenues. For Severn Trent this has meant a raft of cost-cutting measures, including a heavy hit to its dividends.

But the water company won’t stop there, with news emerging last week that it will let its water purification business fall away in a £61.9 million sales deal to partner De Nora. The Italian firm has paid £12.6 million in cash for the business and taken responsibility for £49.3 million of net company debt at the same time.

The sale of the water purification business, which reported a loss of £39.2 million for 2013/14, is seen by Whitman Howard utilities analyst Angelos Anastasiou “to be a good price and a reasonable deal, freeing up some cash”.

With the water purification business sold, Seven Trent chief executive Liv Garfield intends to focus on ensuring the remaining elements of the company’s business services division perform. The businesses within the newly created business division, which was formed in the recent reorganisation of the company, includes the non-regulated areas of the business such as renewable energy and non-domestic retail.

The restructure, and the sale of the water purification business, comes in the wake of the final determination. It saw Severn Trent state that 500 middle management positions were going to be lost. The actual number of job losses was closer to 100 with a number of staff being repositioned and moved elsewhere within the company.

A couple of days after Severn Trent accepted Ofwat’s final determination at the end of January, Garfield also announced that the dividend was being slashed by 5 per cent, and that the company was commencing a £100 million share buyback.

The cut to the dividend is predicted by analysts to save Severn Trent about £70 million during the five year AMP6 period, cash that will be much needed as Severn Trent seeks to make up the difference between its business plan and its final determination.

Aside from the financial preparations that Severn Trent has made to deal with its PR14 settlement, the company is also gearing up to attack the retail market once it opens for non-household competition in 2017.

This is one of the “core businesses” Garfield has said the company remains “committed” to, and in January she unveiled a new management team.

The reshuffle of the management team saw Sarah Bentley hired as the company’s chief customer officer, while Helen Miles took up the role of new group commercial officer. These two leadership appointments were made in order to drive a “greater customer and commercial focus” within the company.

The water purification business, which has been run in conjunction with De Nora for 13 years, was no longer deemed central to Severn Trent, even though the last 18 months have seen improvements made by Severn Trent to its sales process and contract management.

Garfield added: “The business is now on a more stable footing and growing both the top and bottom line. However, it’s clear that in order for the business to fulfil its growth potential it needs manufacturing and product expertise and focus so it’s the right time for it to have a new owner.”

That new owner is Milan-based De Nora, which now owns the water purification business outright and aims to use this to help broaden its footprint in the water treatment sector globally.

On announcing the deal, Industrie De Nora chief executive Paolo Dellachà, said: “Water treatment has always been in the DNA of our company, and a substantial portion of our turnover is generated by sales of products addressing water issues.

“This acquisition certainly enhances the value creation for all customers in need of sustainable solutions for their water treatment requirements and for all our other stakeholders.”

It appears to be a case of the right deal at the right time, especially as M&A season in the UK water sector is now well underway after Pennon, subject to approval from the Competition and Markets Authority, acquired Bournemouth Water in a £100.9 million deal last month.

For Severn Trent, as the reality of the new price control period and the looming market opening set in, its focus is on shoring up its own business and getting set up for the inset of competition. Anything not deemed central to that ambition – middle managers or sections of the business – has been let go.