This article is provided to FT.com readers by mergermarket—a news service focused on providing actionable, origination intelligence to M&A professionals. www.mergermarket.com
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The UK water sector could see a significant spurt of industry consolidation if there is formal un-bundling of the wholesale infrastructure and retail distribution sectors of the business, industry lawyers and regulators told mergermarket.
Ofwat, the industry regulator for England and Wales, will release another consultation document on greater competition in the sector this month, following a previous document in December 2007, said a spokesperson for the regulator.
The spokesperson noted that there has been competition in the water sector since 2003, but that there remained seven large supply companies, and to date no large business customer has switched supplier. The industry regulator has launched various consultations to increase competition.
An M&A lawyer active in the sector said that the nub of the problem is that, with the exception of some very small players, only one water company is allowed per owner, and that the only way that this could change is if there were formal wholesale and retail un-bundling, not just legal separation of the two businesses
The lawyer noted that the merger last year of Mid Kent Water and South East Water was the first time that the direct merger of two water companies had been approved. However, the lawyer added that under the present system it was virtually impossible for the large water players in England and Wales, such as Thames Water and Severn Trent, to buy another large player or to merge.
Another industry lawyer noted that in Scotland, which has a completely different regulatory system than the UK, formal un-bundling will be introduced in April 2008. This source said that Ofwat and indeed the water companies south of the border would be watching what happened in the GBP 320m Scottish market carefully to determine whether or not to introduce formal un-bundling in England and Wales.
Speaking at an industry conference in Glasgow last month, Mark Powles, a director at Business Stream, the Scottish Water business provider, noted that his company would be coming to the market from 1 April with a 100% monopoly, but that the situation in the country after 1 April was the first time in the UK that full de-regulation had been introduced.
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