The Competition and Markets Authority (CMA) has raised concerns that the acquisition of Bristol Water by Pennon Group could undermine Ofwat’s ability to regulate costs and make necessary market comparisons.
The CMA has said unless these concerns are addressed, the authority will refer the merger, which was completed in June, for a phase two inquiry.
The CMA has a duty to assess the deal under two sets of rules, the first of which it passed in November when the regulatory body found it would not reduce competition in the market for non-household retail water and sewerage services.
The second set of rules concerns Ofwat’s ability to regulate the market. The CMA said Pennon’s acquisition of Bristol Water could make it more difficult for Ofwat to compare water companies and set cost allowances.
Pennon has until 31 December to provide remedies to the CMA’s concerns, which will be considered in consultation with Ofwat. The in-depth phase two investigation would begin if suitable answers could not be provided.
Bristol was acquired by Pennon in June for £425 million, adding 1.2 million customers to the group. Pennon Group, which comprises South West and Bournemouth Water, sold its waste management business Viridor last year for £4.2 billion. The sale of Viridor provided funds for the acquisition as well as allowing Pennon to pay a £1.5 billion special dividend to shareholders and buy back £400 million of shares.
Bristol was previously owned by Icon Infrastructure and Itochu in an 80/20 split. The acquisition price equated to a 44% premium on Bristol’s regulatory capital value (RCV).