Pennon bags SES Water in £380m deal with plans to slash gearing

Pennon Group last week brought another water-only company into its fold with the £380m acquisition of SES Water’s parent company.

Pennon – which added Bournemouth Water in 2015 and Bristol Water in 2021 to its core South West Water business as part of its ongoing growth strategy – bought 100% of the issued share capital of Sumisho Osaka Gas Water UK, from Sumitomo Corporation and Osaka Gas, joint owners of SES since 2013.

The value reflects an £89m payment for the equity, and £291m of net debt. Pennon will issue up to £180m of new Ordinary Shares to finance the transaction and inject equity to reduce SES’s gearing from 88% to within Pennon’s target range of 55-65%. Around £11m a year of efficiencies are anticipated.

The Competition and Markets Authority (CMA) has published an initial enforcement order, opening its statutory investigation into the merger. The two businesses will need to be run separately until this is completed, and there will almost certainly be undertakings resulting.

Pennon said it expected a decision from the CMA “within its usual timescales,” with the CMA yet to confirm its timetable. It seems feasible that the case may take longer than the around six months for the Bristol acquisition, given this is Pennon’s third water only company purchase and the sector is under public scrutiny.

The length of the case will determine how much influence Pennon has over SES’s PR24 negotiations with Ofwat. The acquisition is not expected to impact Pennon’s existing plans for a £2.8bn investment programme in 2025-30.

The deal completes a year long strategic review of SES, which its shareholders announced at the end of 2022. The company has 750,000 customers and 476 staff.

Much of the media coverage criticised the deal, given high profile operational issues at South West Water relating primarily to sewage discharges. However, the merger appears to be a good strategic fit for both firms. SES gains financial resilience, an experienced owner and access for its customers to Pennon’s unique shareholding scheme, WaterShare+. Pennon gains size, a well-run operation with high performance on water quality, leakage, supply interruptions and innovation, and the only company in the sector with an intelligent network.