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FTSE 100 water group Pennon has bought Sutton and East Surrey Water from its Japanese owners in a sign of the continued appetite for UK water assets despite concerns over their performance.
Pennon Group, which owns South West Water, said it had acquired SES Water, which supplies 750,000 customers in south-east England, and other ancillary businesses from Sumitomo Corporation and Osaka Gas for a total enterprise value of £380mn. Exeter-based Pennon also announced a £180mn equity capital raise on Wednesday, to keep the enlarged group’s leverage within a gearing range of 55 to 65 per cent.
Pennon said it was paying £89mn for the equity, while SES’s net debt stood at £291mn.
The sale comes despite mounting concerns over the UK’s privatised water monopolies, which have been accused of paying out excessive dividends and pay packages while presiding over severe leakage and pollution failures. Ofwat, the regulator, is also concerned over the weakness of several companies’ balance sheets including SES Water.
SES’s Japanese owners are understood not to have wanted to put equity into the business and instead decided to sell, the Financial Times reported previously. The company is one of six water-only providers in England, with sewage treatment services provided by Thames Water and Southern Water.
Shares in Pennon fell 1.23 per cent in early morning trading on Wednesday before paring those losses. Martin Young, analyst at Investec, said it was “plausible that the need for financial strengthening will see changes in water company ownership”.
He added that the deal was “consistent with Pennon’s strategy” and followed the previous acquisitions of two other water companies, Bournemouth Water and Bristol Water.
The 17 private water companies in England and Wales paid out £1.4bn in dividends in the year to March 2023, while debt rose from £60bn to £68bn, about half of which was tied to inflation.
Water companies including Thames Water, the largest, are asking shareholders to invest equity, many for the first time since the regional water monopolies were privatised 34 years ago. They are also asking regulator Ofwat to approve significant increases to customer bills by 2030, with a final decision as to whether these will be approved expected by the end of this year.
Pennon has asked Ofwat if it can raise bills by 32 per cent by 2030, from an average of £476 per household now to £720 a year, before inflation. The bills would be even higher without a taxpayer subsidy of £50 per South West Water customer introduced in 2013. The government introduced the measure because, although South West Water serves just 3 per cent of the population, it is responsible for protecting about a third of the country’s coastal waters.
Last year, South West Water was fined £2.1mn by the UK’s Environment Agency for pollution offences across Devon and Cornwall spanning four years. South West Water is one of six companies being investigated over concerns that it may be breaching sewage regulations, including potential illegal discharges at more than 2,000 sewage treatment works.
The utility is also being investigated by Ofwat over the accuracy of information it provides on leakage and water consumption.
Susan Davy, chief executive of Pennon, said the purchase was a “fantastic fit for Pennon as we further expand our presence in water supply across southern England, building on our successful similar acquisitions of Bournemouth Water and Bristol Water alongside the adoption of water supply in the Isles of Scilly.”
The deal is subject to approval by the UK competition regulator and comes after Pennon reported a pre-tax loss of £8.5mn for the year ending March 31 last year but raised its dividend by 10.9 per cent to £112mn.
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