Water industry regulator Ofwat has signalled it may be open to takeovers in the sector, a shift from its previous stance against consolidation, as long as they are in customers’ interests.
Jonson Cox, chairman of the watchdog and former boss of Anglian Water, told the Financial Times on Wednesday he was open to an industry-wide discussion about a radical reshaping of the sector, which could see amergers or divestments by operators.
Scenarios envisaged by Mr Cox include the merging of neighbouring companies’ water supply businesses and the combination of companies’ billing and customer service functions across regions to create economies of scale.
He also argued that bigger companies could separate their water supply businesses from their sewerage functions, both of which could be merged into larger units to attract different categories of investors.
“We’re not out to encourage consolidation — indeed de-consolidation could be viable — but we recognise that we and the Competition and Markets Authority may receive proposals to do so,” Mr Cox said. “We’re interested in different ideas.”
He conceded that any shake-up of the sector would be a radical departure for water companies across England and Wales.
The majority of households have historically been served by vertically integrated regional operators — responsible for all services from reservoir to tap and sewer to treatment works.
Mr Cox’s remarks come amid the delivery of bills this week to millions of households served by the 18 companies overseen by Ofwat, under a five-year settlement that will cut bills in real terms for most consumers for the remainder of the decade.
But a combination of inflation-proofed returns and gains from low interest rates have led to accusations by consumer groups that water companies are making excessive profits, which has attracted sovereign wealth funds and other overseas investors.
While opening the door to early-stage talks over a restructuring of water companies, Mr Cox said there was no particular evidence that smaller companies in the sector were naturally less efficient than larger players.
He told the Policy Exchange think-tank, in a speech on Wednesday, that “comparative regulation has been very powerful but is also a constraint”.
Despite high-value deals in the sector, few have resulted in mergers or radical changes to company structures. The most recent merger permitted by Ofwat and competition authorities was between two smaller players — South Staffs and Cambridge Water — in 2012.
Over the past decade Southern Water has been sold to a consortium led by JPMorgan Asset Management for an enterprise value of £4.2bn and Northumbrian Water was sold to Hong Kong-based Cheung Kong Infrastructure for an enterprise value of £4.74bn in 2011.
Large chunks of Thames Water, the UK’s biggest player, have been bought by Gulf-based and Chinese investors at high premiums.
Severn Trent, one of only three remaining publicly listed water companies, rejected a £5.3bn approach from a consortium led by Canadian investor Borealis and backed by the Kuwait Investment Office in 2013, highlighting the allure of UK water companies to foreign investors.
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