Analysis: Southern Water confirms exit

As Southern Water becomes the second water company to reveal it will exit the non-household retail market, Lois Vallely looks at what this latest deal means for the companies involved.

Market opening is approaching at an alarming rate, and water companies continue to make it clear to what extent they wish to participate in the market. Southern Water has become the latest to announce its intention to exit the non-household water retail market when competition is introduced – news that came as no surprise to many in the industry.

Also, unsurprising was the news that ambitious Scottish Water subsidiary Business Stream will take on the incumbent water and sewerage company’s business customer base. The new entrant has not shied away from expressing its wish to enter the English water retail market at large, having said last June that the company was “perusing a number of different opportunities for market entry into England post-2017”.

Southern Water says the decision to offload its business customers – which represent a mere 5 per cent of its overall retail customer base – will enable it to “focus on additional service improvements for its household customers”. The company has declined to comment further at this stage.

It does, however, say that one of the reasons for choosing Business Stream is the retailer’s wealth of experience in the existing market. “After looking carefully at the options available to us, we have decided to sell our non-household retail business to Business Stream, a specialist retailer that has been at the forefront of the competitive market in Scotland for eight years,” says Southern chief executive, Matthew Wright.

It was Business Stream, though, that approached Southern Water after research highlighted the water and sewerage company as a “suitable acquisition target” that would allow the audacious new entrant to enter the market on scale. Business Stream chief executive Jo Dow says the acquisition provides the firm with a “springboard for growth” and will create “huge opportunities”, because it in effect doubles the size of its customer base to more than 200,000.

Dow says that, by creating the third largest UK non-domestic water supplier, the firm has “forged a bright future for its existing workforce”, creating new jobs and building a “foundation for growth”.

She tells Utility Week that location was also a “big driver” for the move, with Thames Water, Anglian Water and Water Plus – three of the largest market participants – all in close proximity.

“Although we’ve used this transaction to gain that immediate scale, we are also very much with an eye on medium- to longer-term growth,” she says. “And the location will be important for that growth.”

Business Stream says it will consider further acquisitions from companies wishing to exit the retail market. “We’ve made no secret of our ambitions – that we want to grow the business – and we’ve always said we were looking at joint venture, acquisition, partnership.”

Nearly all companies have now confirmed whether they intend to participate in the new market, and those that haven’t are expected to reveal their plans soon, ahead of shadow market opening in October this year and full market opening in April 2017, and applications for water and sewerage service licences have been flooding in, with 12 applications received to date.

Suppliers such as new entrant Everflow tell Utility Week they are considering buying into the English market when it opens, and Veolia UK also says it wants to grow its retail activities in the UK water market.

However, as Dow warns, time is short: “Nine months is really not an awful lot of time, and I think there is still much to do to create the market infrastructure and everything else that is needed to compete in that market.”