Who will blink first in bids for WPD?

This month is proving to be a very eventful one on the subject of how much of a return investors can expect from UK utilities in the near future.

For water companies, there should be some semblance of clarity next week from the Competition & Markets Authority. In energy, the gas and transmission networks are just starting out on their appeals against Ofgem’s cost of capital calculations, while the regulator this morning revealed its expectations for returns in electricity distribution.

To make matters even more complicated, the sector will soon have a real-world example of returns on investment.

According to Bloomberg, there are now three final bidders for Western Power Distribution, which was put up for sale last year by PPL Corporation, its owner of 20 years.

Iberdrola and Macquarie have been constantly cited as suitors for WPD throughout the process. Added to that list in recent months has been Europe’s biggest utility, Italy’s Enel Group. The three are expected submit final offers within the coming weeks.

Earlier speculation had the asking price at c£12 billion but Bloomberg now cites £10 billion. This is still a 25 per cent premium on the regulatory asset value and some experts told Utility Week the presence of Macquarie could push the price up higher.

One said: “I have never known Macquarie to knowingly underpay and they very rarely lose auctions.”

The same source said Iberdrola was more likely to exercise caution but has the most to gain from synergies post-acquisition.

However, they added: “Enel has deep pockets and if they’ve set their sights on this, they could make it difficult for the others.”

The prospect of Enel having a sizeable interest in the UK is an intriguing one and according to another source, it could lead to further acquisitions.

They said: “We know they like retail but I suspect that if they buy this then they are gearing up to be big in the UK. I don’t think they’ll stop at just a distribution asset.

“They’ve resisted offshore wind so far but could this be the right time for them to get into it? They’re one of the world’s biggest renewable companies without that string to their bow. So, I’d see that as a direction they could go in the UK. Either organically or through M&A.”

Whoever emerges as the successful bidder will of course then be thrust straight into a debate about their future returns. This would be especially interesting for Iberdrola, given its companies have been among the most vocal on the need for higher returns to attract the investment needed to hit net zero.

As one source put it: “I’m not sure who will be more excited by a big return in this deal – PPL or Ofgem.”