The U.K.’s biggest energy providers, under pressure from Prime Minister Theresa May’s plan to cap prices, may see more mergers if the competition watchdog authorizes SSE Plc and Innogy SE’s plan for a new utility.

The 30-billion pound ($39 billion) market is still dominated by some of Europe’s biggest utilities, but their combined share of customers has been declining for years. The so-called Big Six are losing households to upstarts offering lower prices and better customer service.

The latest threat is the government’s plan to end what it calls “rip off” standard tariffs that still cover two-thirds of the market. It was intervention that spurred Perth, Scotland-based SSE to team up with the U.K. unit of Germany’s Innogy, their chief executive officers said on Wednesday.

And unless the U.K.’s Competition and Markets Authority puts a wrench in the works for the biggest shakeup of the sector in more than a decade, other utilities could follow suit.

“If the CMA approves this deal without any conditions or restrictions, what stops EDF, Scottish Power or EON from putting forward a similar combination?” said Deepa Venkateswaran, a European utilities analyst at Sanford C. Bernstein & Co. in London. “Arguably their combined market shares would be even lower than the SSE-Innogy combination.”

SSE CEO Alistair Phillips-Davies is confident of getting approval, and sees the deal closing in the fourth quarter of next year or in early 2019, he said Wednesday.

The CMA is “aware of the announcement” but declined to comment further.

With about 11.5 million customer accounts, the new company would be the U.K.’s second-largest household supplier after Centrica Plc’s British Gas unit. SSE shareholders will hold 66 percent and Innogy will get a 34 percent stake in the business.

“This smacks of two dinosaurs coming together to survive,” said Ed Kamm, the chief commercial officer at independent energy supplier First Utility Ltd. in Warwick, England. “A merger of this scale will carry significant cost and risk of service disruption, both of which will be most keenly felt by their customers.”

There may be more deals among bigger and smaller suppliers, but there’s probably limited appetite for mergers in the rest of the Big Six because of the political risks in the U.K., said Lakis Athanasiou, an analyst at Agency Partners LLP in London.

At least one competitor isn’t blinking. German utility EON SE’s U.K. retail unit can survive on its own, even in the volatile political and regulatory environment, Chief Financial Officer Marc Spieker said Wednesday. Earnings for the company’s British customer business sank 37 percent in January to September.

“State-imposed prices or caps have never spurred competition,” he said, adding that the company’s focus in the U.K. is to expand customer offers and cut costs. Other strategic options are excluded, at least for now, Spieker said.

EON lost 200,000 customers in the U.K. in the first nine months of the year, with most departures in the first quarter, the company said Wednesday in its earnings report.

Innogy’s Npower unit has also been plagued by customer losses, complaints and a faulty IT system. While results are recovering, the unit won’t return to profit this year, Chief Executive Officer Peter Terium said Wednesday on a call with reporters.

Electricite de France SA’s U.K. unit and Iberdrola SA’s Scottish Power didn’t respond to requests for comment.

Source:
courtesy of BLOOMBERG

by U.K. Likely To See More Utility Mergers If SSE Deal Approved

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