The announcement that SSE will not pursue its planned SSE Energy Services tie-up with Npower was not a total surprise: the former was to own 65.6 per cent of the new company whilst the latter’s owner, Innogy, was due to assume a 34.4 per cent stake.
In recent weeks, the rumour-mill indicated that all was not well, especially after the November update flagged certain issues: clearly, SSE was having real difficulties in making the numbers stack up.
And so it has come to pass, with SSE’s chief executive, Alistair Phillips-Davies, confirming that SSE was unable to reach agreement on revised commercial terms.
More specifically, he highlighted the complexity of the deal, with its many moving parts.
Given that the deal emerged virtually unscathed from the Competition and Markets Authority, SSE’s u-turn is certainly late in the day.
Looking forward, though, there are two key points that SSE has sought to highlight.
First, its Energy Services division is effectively up for sale. SSE’s statement was clear that potential bidders for this division would be very welcome.
Secondly, SSE was keen to emphasise that this division was both profitable and cash positive – and, by implication, that yesterday’s (18 December) news should not be seen as endangering its low-covered dividend.
Nonetheless, there will be sizeable exceptional items in SSE’s 2018/19 full-year accounts relating to the aborted deal.
To be sure, SSE’s share price has been a poor performer of late as investor concerns about the sustainability of its dividend are to the fore.
The news saw a slight decline in its share price but well below the fall of several retail clothing stocks whose shares remain under the cosh due to lacklustre trading – foot-fall levels are weak – and Asos’ heavy profit-warning.
In recent years, the UK energy supply market has been immensely challenging. The share of the “big six” incumbents has fallen from near 100 per cent in recent years to below 80 per cent currently – and with increasing pressure on margins.
The risks faced by energy suppliers are many. Aside from low margins, the delayed introduction of Ofgem’s controversial price cap – now an average £1,137 per year – has caused much uncertainty.
Furthermore, the ongoing political shenanigans have raised the political stakes, with a real possibility of an early general election, especially if the Brexit impasse persists.
Against that background, it is hardly surprising that, like its German counterpart, Eon, SSE has declared that investment in renewable generation – assuming the attractive financial support regime endures – and regulated networks are its priorities.
Hence, it now seems that the “big six” will remain just that unless SSE’s hopes of a potential buyer for its Energy Services division are realised.
In truth, it is difficult to see much enthusiasm from the other five players. All, with the exception of Iberdrola, face a raft of challenges.
However, as Scottish Power’s owner, Iberdrola does have particular expertise in Scotland’s energy market and seems likely – at least – to run its ruler over SSE’s Energy Services business.
Another possible deal would see Eon taking on part – or all – of SSE’s customer base directly. It is already involved in a complex asset swap with RWE, which is based on it acquiring RWE’s 76.8 per cent shareholding in Innogy.
A more left-field possibility is interest from First Utility, which is now owned by Shell. Of course, given Shell’s vast size, there would be no problem in raising the necessary finance, if First Utility were to pursue this route.
Undoubtedly, SSE’s exit from the planned deal will have a major impact on Innogy, Npower’s German owner.
Innogy has already confirmed that its adjusted earnings before interest and tax (EBIT) will be cut by circa €250 million in 2019 – a very sizeable hit.
It is unclear how Eon will respond to SSE’s planned exit. It seems likely, though, that it will mean renewed talks with RWE on the basis of a “material” change to the planned asset swap agreement.
Undoubtedly, SSE’s exit from its planned energy supply deal is messy -and it will be expensive.
On the other hand, as Denis Healey, a leading Labour party light of the past, used to say – “when you’re in a hole, stop digging”.
SSE has done just that.