With the prospect of water companies in England and Wales floating off their retail businesses and mergers of the water and wastewater networks there is not a more interesting time to consider M&A activity in the sector.
As Ofwat prepares for full opening of the non-household market from April 2017 the Competition and Markets Authority (CMA) is already grappling with the implications of the reforms introduced by the Water Act 2014 (see here). As well as considering them in the context of Bristol Water’s price control reference it is currently investigating Pennon Group’s (owner of South West Water) completed acquisition of water only company, Bournemouth Water.
The starting gun having already been fired, the CMA is currently consulting on its approach to water mergers under the revised special regime for water mergers, which is due to take effect in November this year. The revised regime relaxes the rules for water mergers, allowing them to be cleared following a phase 1 investigation (rather than requiring an automatic full phase 2 investigation). The new regime will also allow water mergers to be cleared with undertakings from the merging parties sufficient to address any competition or regulatory concerns.
Whilst the 2014 Act did not require formal separation of water companies’ retail and wholesale activities the reforms do change fundamentally the dynamics of the industry. A number of water companies are already restructuring to be ready to take advantage of new opportunities in the market. One possible outcome of this could be a market structured more along the lines of the current GB energy market, or perhaps initially, a market similar to the water market in Scotland. However it develops, the tectonic plates of the water industry are now finally shifting and investors and those outside the industry will be carefully assessing future opportunities in this market.
Given there is still a special regime for water mergers, the purposes of which remains to protect Ofwat’s ability to compare relative efficiencies of different companies when setting price controls, there is the potential for first mover advantage, and the possibility of to the victor the spoils.
Companies, investors and others interested in exploring these opportunities will need to understand the complex interplay between the revised special regime for water mergers, the general UK mergers regime that would still be applied to non-regulated activities and the overarching EU merger regime, the triggering of which requires mandatory filing to the European Commission.
The consultation runs until 15 October 2015. The draft guidance and accompanying consultation document can be found here. Finalised guidance will be issued once the water merger provisions of the Act come into force, expected in November this year.