Leader: Volatility swells the attractions of utility assets

As the opening of the non-domestic water market approaches, most eyes in the water sector have understandably focused, with heightened anticipation, on the manoeuvres of companies as they prepare for competition.

In 2016, these preparations have included launches of critical IT systems, poring over retail strategies, and the announcement of a number of high-profile acquisitions, mergers and joint ventures – the most recent of which is a marriage between Pennon and South Staffordshire Group. We have even seen some new entrants, such as The Water Retail Company, headed by the Energy Managers Association’s Lord Redesdale, which aims to capitalise on synergies between energy and water efficiency.

However, while commentators have engrossed themselves in speculation about how effective all this groundwork will be in prompting water account switching, back in the world of domestic supply a tussle between the aspirant buyers of a relatively small water-only company has suddenly escalated into a significant industry story (see p19).

The bidding war between Severn Trent and infrastructure investment firm Ancala for ownership of Dee Valley Water seemingly sprang from nowhere, taking even the bidders by surprise.

It appears likely as we went to press that Severn Trent will win out, saving the company face after its bold statement on 16 November that the acquisition of Dee Valley was a done deal – only to be outbid within the week by Ancala.

Whoever wins this takeover battle will gain a promising asset, serving 260,000 households and with rapidly improving customer service and efficiency records, all in a stable regulatory regime.

Dee Valley’s acquisition has been a messy affair, but it demonstrates two things very clearly. First, we should not expect all the interesting action in the water sector to come from the newly competitive business retail market. And second, we should not underestimate investors’ desire to add reliable utility assets to their portfolios in the current volatile economic environment.

Further acquisitions and consolidation can be expected, and the most attractive deals are unlikely to come without a fight.

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