Pennon’s acquisition of SES Water is expected to take up to a year to pass regulatory checks.
It means the deal may not be signed off until after final determinations for PR24 business plans are complete in December.
The group’s chief executive Susan Davy said that she anticipates the acquisition to take between six to 12 months to gain regulatory approval from Ofwat and the Competition and Markets Authority (CMA).
That estimate is based on the group’s previous acquisition of Bristol Water in 2021. For Bristol, which was added to Pennon’s portfolio in 2021, separate reporting was stipulated by the CMA as a term for approving the deal to ensure Ofwat can continue to benchmark fully.
Davy added that she believes that would also be “the right way to go” for SES.
“We have had the opportunity to have some conversations ahead of transacting and anticipate it to be a similar process as Bristol,” Davy said.
Utility Week understands no hurdles are anticipated clearing the regulatory approval process and that the deal was agreed upon based on the business plans SES submitted to Ofwat in October for 2025-30 (AMP8).
Davy would also not rule out further acquisitions in the south east of England, which has multiple water-only companies, and said Pennon would continue to look for opportunities in the acquisition space.
“We have a history of successful acquisitions”, Davy said in reference to Bournemouth and Bristol, “but have a measured approach to where we believe we might add value”.
Current SES owners Sumitomo Corporation and Osaka Gas put the firm on the market last year. They had to stump up more than £20 million in July to address Ofwat’s concerns about financial resilience.
Recently appointed chief financial officer at Pennon, Steve Bucks, explained the plan to improve resilience at SES.
“It’s highly geared with expensive debt,” Bucks said and added that until the deal is complete, Pennon can provide solvency support but not touch the debt book.
After that, Pennon intends to “quickly” remedy one-third of that debt before addressing financing costs.
Bucks said SES’ high cost of finance was “dragging it down”, which Pennon would address after getting regulatory clearance.
Of the remaining debt, which is securitised, Bucks said Pennon would was not in a position to retire the debts and would continue to service until maturity from 2027.
Bucks said SES had consistently overspent on retail, and recently has overspent its total expenditure (totex) relating to mains replacements. This spike, Pennon believes will flatten after a year of extreme weathers causing pipe bursts.
Alongside the acquisition, Pennon announced an equity launch to drive gearing down to within Pennon Group’s current range of 55%-65%. Currently, SES’ gearing ratio is 72%.
The £180 million equity raise completed within its first day (10 January). The funds will solely be used to keep Pennon in the position it would have been in prior to the acquisition, Davy said and explained the company was comfortable with no previous need for equity.