REG - Pennon Group PLC - PENNON ACQUISITION OF SES WATER

PennonAnnouncement

10/01/2024 07:00

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RNS Number : 1672Z  Pennon Group PLC  10 January 2024

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SECURITIES IN ANY JURISDICTION.

THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION

10 January 2024

PENNON GROUP PLC ACQUISITION OF SUTTON AND EAST SURREY WATER
 

Pennon Group plc ("Pennon", the "Group" or the "Company") is pleased to
announce that it has today acquired 100% of the issued capital of Sumisho
Osaka Gas Water UK Limited ("SOGWUK"), the holding company of Sutton and East
Surrey Water plc ("SES Water") and certain other ancillary businesses, for
£89 million from Sumitomo Corporation and Osaka Gas, with a total enterprise
value of £380 million (the "Acquisition").

Pennon is also announcing its intention to issue new Ordinary Shares to raise
up to £180 million (the "Equity Capital Raise") in connection with the
Acquisition, in order to ensure that the pro forma leverage and capital
structure for the enlarged Group following the Acquisition remains consistent
with Pennon's well-established water business gearing range of 55-65%((1)).

 

Key Investment Highlights

·    Acquisition of SES Water and other ancillary businesses, adding a
high-quality business with over 750,000 customers and a forecast shadow
Regulatory Capital Value ("RCV") of £351(()(2)()) million as of 31 March 2024

·    Purchase price of £89 million for the equity, including repayment to
the vendors of £14 million of equity invested into SOGWUK since 31 March 2023

·    Enterprise value of £380 million based on net debt of £291(()(3)())
million (as of 31 March 2023)

·    Enterprise value equates to a premium to SES Water 2023 RCV of c.6%
(after certain adjustments)((4)). The transaction is expected to increase the
Group's RCV by c.7% on Acquisition

·    SES Water's 2025-2030 regulatory period ("K8") RCV is forecast to
grow at an attractive average annual rate of c.5%((5))

·    Builds on Pennon's existing water operations by acquiring another
high-quality, water-only business, along with access to an experienced and
talented management team, and follows the successful previous acquisitions of
two water-only companies

·    Acquisition will benefit SES Water's customers and other stakeholders
- SES Water's customers will be offered the opportunity to participate in
Pennon's unique WaterShare+ customer shareholding scheme

·    Expected to be earnings accretive from the first year of full
ownership (2024/25), and to generate attractive returns whilst supporting
further RCV growth in the 2020-2025 regulatory period ("K7"), bringing total
expected growth over K7 for Pennon to 71%

·    Complementary ethos focused on customer affordability and delivering
better outcomes for customers and the environment with SES Water's digital
capabilities and smart technologies complementing Pennon's current offering

·    Consistent with Pennon's successful track record of value creation
through the realisation of synergies, a run rate of £11((6)) million per
annum is anticipated, enabling enhanced shareholder returns, driven by
operational efficiency initiatives, lower financing costs and economies of
scale

 

Commenting on the Acquisition, Susan Davy, Group Chief Executive said:

"SES Water is a fantastic fit for Pennon as we further expand our presence in
water supply across Southern England, building on our successful similar
acquisitions of Bournemouth Water and Bristol Water alongside the adoption of
water supply in the Isles of Scilly.

The business is a proven, high-quality water operation. We are particularly
impressed by the innovation and technology-led solutions implemented by SES
Water.

As part of the Pennon Group, we will enhance SES Water's financial resilience
and better position the business to serve its customers and all stakeholders,
as has proven to be the case with our acquisitions of Bournemouth Water and
Bristol Water.

We are able to invest in SES Water's resources infrastructure, environment and
people thanks to our strong financial performance and long-term UK shareholder
base, delivering a seamless transition for SES Water's customers while also
providing a more robust and reliable service in the medium term.

We expect SES customers to benefit from Pennon's stewardship of the business,
including being able to offer them the opportunity to participate in our
unique WaterShare+ scheme and participate in the ownership of their local
water provider."

 

Financing and Expected Timetable

·    Completion of the Acquisition, which is not subject to any
conditions, has already occurred

·    The Acquisition will now be subject to review by the Competition and
Markets Authority ("CMA"), with input from the Water Services Regulation
Authority ("Ofwat"). Pennon considers that the Acquisition will create a net
benefit for customers and shareholders and expects to receive a decision from
the CMA within its usual timescales

·    The Acquisition is being financed from existing cash and financial
resources

·    There is not expected to be any funding impact on South West Water's
plans to otherwise deliver a compelling AMP8 investment plan

·    The proceeds from the Equity Capital Raise will be used in connection
with the Acquisition to ensure that the enlarged Pennon Group remains within
our well-established water business gearing range of 55-65%((1)) following
completion

·    Further information on the Equity Capital Raise and the use of
proceeds from it can be found in the separate announcement being released by
Pennon today

 

Webcast and Conference Call

A webcast for investors and analysts will take place today at 8.00am (GMT) by
Susan Davy, Group Chief Executive and Steve Buck, Group Chief Financial
Officer, immediately followed by a live Q&A.

The webcast can be accessed here: Investor Information | Pennon Group PLC
(pennon-group.co.uk)
(https://clicktime.symantec.com/15sMRT1wCYWYWGD6v4YcR?h=NGm63LS013-Mz7tJb_EcRMYc2aX2UTFCALLsFXMDZs8=&u=https://www.pennon-group.co.uk/investor-information)

The presentation can be accessed here:
https://www.pennon-group.co.uk/investor-information/financial-reports-and-presentations

The conference call can be accessed using the details below.

United Kingdom (Toll-Free):      +44 800 358 1035

United Kingdom (Local):              +44 20 3936 2999

Global Dial-In Numbers
(https://clicktime.symantec.com/15sMWHCv8ModrxN4NYnGa?h=TN1AdxMrv2TUG6tXtRFVz2X22jjHxpzdf_ofeuUSoLg=&u=https://www.netroadshow.com/conferencing/global-numbers?confId%3D59146)

Conference passcode:   956400

 

For further information, please contact:

Pennon Group
PLC
 

Steve Buck                          Group Chief
Financial
Officer
             +44 (0)1392 44 3168

Jennifer Cooke                   Group Head of Investor Relations

 

Media Enquiries

James Murgatroyd            FGS Global
 
        +44 (0)207 251 3801

Harry Worthington

 

Barclays Bank PLC

Lead Financial Adviser and Joint Corporate Broker
                                       +44 (0) 20 7623
2323

Alisdair Gayne, Iain Smedley, Osman Akkaya, Richard Bassingthwaighte

 

Morgan Stanley & Co. International plc

Joint Financial Adviser and Joint Corporate Broker
                                      +44 (0) 20 7425 8000

Andrew Foster, Francesco Puletti, George Chalaris, Josh Williams

 

Background to and rationale for the Acquisition

The Acquisition of SES Water marks an important step for the Group as it looks
ahead to the K8 (2025-30) regulatory period. The Board considers SES Water to
be highly complementary, adding a high-quality, water-only operation to the
Group. Building on Pennon's track-record of acquisitive growth and value
creation evidenced through the acquisition and integration of Bournemouth
Water and Bristol Water, the addition of SES Water further increases the water
element of RCV to represent c.57% of the Group's total RCV((7)).

The Acquisition of SES Water represents a strong strategic fit for the Group
and has been assessed in line with the Board's highly disciplined review of
potential growth opportunities, conforming with our twin-track growth
strategy. In reviewing the Acquisition, the Board considered a range of
factors including earnings accretion, value creation from the impact on
shareholder returns and the impact on customers and other stakeholders.

The Board believes that the Acquisition presents an attractive opportunity to
further expand South West Water's wholesale capabilities, whilst also
deploying best practice from both businesses to deliver value for customers,
shareholders and wider stakeholders.

In addition, Pennon represents a stable, well-financed and long-term custodian
of SES Water that will enhance SES Water's financial resilience and is able to
invest in SES Water's water resources infrastructure, environment and people
owing to Pennon's strong financial performance and long-term UK shareholder
base.

Furthermore, Pennon's ownership and approach to the local delivery of local
services will give SES Water customers greater advocacy, involvement and
ownership in their water provider with Pennon's unique share issuance scheme
WaterShare+, providing SES Water customers with the opportunity to become
shareholders in their local water company.

The Acquisition will increase the size and scale of the Group to serve a total
population of c.4.3 million and will deliver an estimated c.7% increase in RCV
on acquisition, bringing total expected RCV growth for Pennon to 71% over K7.
It also adds another 476 dedicated employees to the Group, enabling access to
a new, wider and diverse talent pool in Southern England.

Completion of the Acquisition, which is not subject to any conditions, has
already occurred. Following completion, the Acquisition will now be subject to
review by the CMA, with input from Ofwat.

SES Water and the other ancillary businesses which make up the Acquisition
will be managed separately from the rest of the Pennon Group until the CMA
review is complete.

Under the terms of the Acquisition, Pennon is making a total aggregate cash
payment of £89 million to Sumitomo Corporation and Osaka Gas for 100% of the
issued share capital of SOGWUK, which includes £14 million to reimburse
equity contributions they have made to SOGWUK since 31 March 2023.

The size of the Acquisition means that it represents a Class 2 transaction for
the purposes of the UK Financial Conduct Authority's Listing Rules.

 

About Pennon

Pennon Group plc is a FTSE 250 listed UK focused environmental infrastructure
group, comprising South West Water (incorporating Bristol Water and
Bournemouth Water), Pennon Water Services, Pennon Power, a stake in
Water2business and now including SES Water and a number of other ancillary
businesses which make up the Acquisition.

South West Water is one of the leading businesses in the UK water sector,
providing water and wastewater services to a population of c.3.5 million
across nine counties in the South West.

The Company provides over 870 million litres of safe, clean drinking water
every day, in addition to the management of c.23,000km of sewer network used
to transfer water and surface water run-off to one of our 653 wastewater
treatment works where it is treated, tested and safely returned to the
environment.

Following the Acquisition, the Group anticipates RCV growth over the K7
(2020-25) period of 71%, resulting in an RCV of £5.8 billion by 2025. Looking
to the K8 (2025-30) period, we expect RCV growth of c.37% including the
Acquisition, bringing total expected RCV growth 2020-2030 to c.134%.

Pennon Water Services is an 80:20 venture with South Staffordshire Plc, and
provides retail water and wastewater and value-added services to around
160,000 non-household customer accounts across England and Scotland, and is
focused on delivering long-term, sustainable growth.  Water2business is a
30:70 venture with Wessex Water, providing retail water and wastewater
services to over 180,000 non-household accounts across England and Scotland.

Further information on Pennon can also be found on the Group's website,
www.pennon-group.co.uk

Pennon LEI: 213800V1CCTS41GWH423

 

About SOGWUK and SES Water

SOGWUK

SOGWUK is the holding company for SES Water and certain other ancillary
businesses including SES Home Services, SES Business Water, Allmat Limited,
Advanced Minerals Limited and Surrey Downs Property Investments Limited,
however these are very small in size in the context of SES Water.

SOGWUK had adjusted net debt of £291((3)) million as of 31 March 2023.

SOGWUK had gross assets of £613 million as at 31 March 2023 and profit before
tax of (£31 million) for the period 31 March 2022 to 31 March 2023.

 

SES Water

SES Water is a local water supplier company in South East of England with over
150 years of operating history in the abstraction, treatment, storage and
distribution of clean potable water to household customers and businesses.

Serving over 750,000 customers, its designated geographical coverage, includes
neighbourhoods of East Surrey, West Sussex, West Kent and South London.

Purpose led, SES Water's aim is to harness the potential of water to enhance
nature and improve lives. It aims to achieve this by placing customers and the
environment at the heart of its decision making and driving transformation
through digital innovation as an industry leader in smart networks.

SES Water is one of the best performing water companies across a range of
indicators including:

·    Reliability of service - a top performer on supply interruptions in
2023

·    Reducing leakage - targeted reduction plan on track

·    Water quality - upper quartile performance in the sector

SES Water had an RCV of £334 million as of 31 March 2023 and an RCV of £351
million estimated as of 31 March 2024((2)).

 

Important notices

The person responsible for arranging the release of this announcement on
behalf of the Company is Andrew Garard, Group General Counsel and Company
Secretary.

 

This announcement is being issued by and is the sole responsibility of the
Company. This announcement is for information only and does not itself
constitute, contain or form part of an offer to sell or issue or the
solicitation of an offer to buy or subscribe for securities referred to herein
in any jurisdiction including, without limitation, the United States, any
other Restricted Territory (as defined below) or in any jurisdiction where
such offer or solicitation is unlawful. No public offering of securities will
be made in connection with any securities referred to herein in the United
Kingdom, the United States, any other Restricted Territory or elsewhere.

 

This announcement is restricted and is not for publication, release,
distribution or forwarding, in whole or in part, directly or indirectly, in or
into the United States of America (including its territories and possessions,
any state of the United States, Australia, Canada, the Republic of South
Africa, Japan (each a "Restricted Territory") or any other jurisdiction in
which such release, publication, distribution or forwarding would be unlawful.
No public offering of the securities referred to herein is being made in any
such jurisdiction or elsewhere. This information has not been approved by the
London Stock Exchange, nor is it intended to be so approved.

 

The securities referred to herein have not been and will not be registered
under the United States Securities Act of 1933, as amended (the "Securities
Act"), or with any securities regulatory authority of any state or other
jurisdiction of the United States, and may not be offered, sold or transferred
directly or indirectly in or into the United States, except pursuant to an
exemption from, or in a transaction not subject to, the registration
requirements of the Securities Act and in compliance with the securities laws
of any state or any other jurisdiction of the United States. No public
offering of any securities referred to herein is being made in the United
States.

 

No offering document or prospectus will be made available in any jurisdiction
in connection with the matters contained or referred to in this announcement
and no such offering document or prospectus is required (in accordance with
the EU Prospectus Regulation or UK Prospectus Regulation) to be published.

 

Persons (including, without limitation, nominees and trustees) who have a
contractual or other legal obligation to forward a copy of this announcement
should seek appropriate advice before taking any action.

 

Certain statements in this announcement are forward-looking statements
relating to the Group's operations, performance and financial position based
on current expectations of, and assumptions and forecasts made by, management.
They are subject to a number of risks, uncertainties and other factors that
could cause actual results, performance or achievements of the Group to differ
materially from any outcomes or results expressed or implied by such
forward-looking statements. Often, but not always, forward-looking statements
can be identified by the use of forward-looking words such as "plans",
"expects", "is expected", "is subject to", "budget", "scheduled", "estimates",
"forecasts", "goals", "intends", "anticipates", "believes", "targets", "aims"
or "projects". Words or terms of similar substance or the negative thereof,
are forward-looking statements, as well as variations of such words and
phrases or statements that certain actions, events or results "may", "could",
"should", "would", "might" or "will" be taken, occur or be achieved. Such
statements are qualified in their entirety by the inherent risks and
uncertainties surrounding future expectations.

 

Forward-looking statements include statements relating to: (a) future capital
expenditures, expenses, revenues, earnings, economic performance,
indebtedness, financial condition, dividend policy, losses and future
prospects; (b) business and management strategies and the expansion and growth
of the Company's operations; and (c) the effects of global economic conditions
on the Company's business.

 

Such forward-looking statements involve known and unknown risks and
uncertainties that could significantly affect expected results and are based
on certain key assumptions. Many factors may cause actual results, performance
or achievements of the Company to be materially different from any future
results, performance or achievements expressed or implied by the
forward-looking statements. Important factors that could cause actual results,
performance or achievements of the Company to differ materially from the
expectations of the Company, include, among other things, general business and
economic conditions globally, industry trends, competition, changes in
government and changes in regulation and policy, including in relation to the
environment, health and safety and taxation, labour relations and work
stoppages, interest rates and currency fluctuations, changes in its business
strategy, political and economic uncertainty and other factors. Such
forward-looking statements should therefore be construed in light of such
factors.

 

The Group's principal risks were described in the 2023 Pennon Group Annual
Report which can be viewed online at http://annualreport.pennon-group.co.uk.
Such forward looking statements should therefore be construed in light of such
risks, uncertainties and other factors and undue reliance should not be placed
on them. They are made only as of the date of this announcement and no
representation, assurance, guarantee or warranty is given in relation to them
including as to their accuracy, completeness, or the basis on which they are
made.

 

Neither the Company nor any of its directors, officers, employees or advisers
provides any representation, assurance or guarantee that the occurrence of the
events expressed or implied in any forward-looking statements in this
announcement will actually occur. You are cautioned not to place undue
reliance on these forward-looking statements, which speak only as at the date
of this announcement.

 

No obligation is accepted to publicly revise or update these forward-looking
statements or adjust them as a result of new information or for future events
or developments, except to the extent legally required. Nothing in this
announcement should be construed as a profit forecast or profit estimate.

 

Neither the content of the Company's website (or any other website) nor the
content of any website accessible from hyperlinks on the Company's website (or
any other website) is incorporated into or forms part of this announcement.

Barclays Bank PLC ("Barclays"), which is authorised in the United Kingdom by
the Prudential Regulation Authority and regulated in the United Kingdom by the
Prudential Regulation Authority and the Financial Conduct Authority, is acting
exclusively as lead financial adviser and joint corporate broker to the
Company and no one else in connection with the Acquisition. In connection with
such matters, Barclays, its affiliates and their respective directors,
officers, employees and agents will not regard any other person as their
client, nor will they be responsible to anyone other than the Company for
providing the protections afforded to clients of Barclays nor for providing
advice in connection with the Acquisition, the contents of this announcement
or any matter referred to herein.

 

Morgan Stanley & Co. International plc ("Morgan Stanley"), which is
authorised in the United Kingdom by the Prudential Regulation Authority and
regulated in the United Kingdom by the Prudential Regulation Authority and the
Financial Conduct Authority, is acting exclusively as joint financial adviser
and joint corporate broker to the Company and no one else in connection with
the Acquisition. In connection with such matters, Morgan Stanley, its
affiliates and their respective directors, officers, employees and agents will
not regard any other person as their client, nor will they be responsible to
anyone other than the Company for providing the protections afforded to
clients of Morgan Stanley nor for providing advice in connection with the
Acquisition, the contents of this announcement or any matter referred to
herein.

 

 

Note: All £m and % numbers shown to 0 decimal places. Potential differences
due to rounding.

((1)) Gearing at the regulated water business level, defined as net debt / RCV

((2)) Based on management forecast of RCV as at 31 March 2024

((3)) Reported net debt adjusted to include unamortised issuance costs and
short term debt, before fair value uplift, rounded down from actual figure of
£291.52m

((4)) Premium stated before £14 million of vendor equity contributions since
31 March 2023 and reflects adjustments including pensions and Pennon's view on
the value of unregulated assets

((5)) K8 total nominal growth rate of 25%, based on SES Draft Business Plan
for AMP8

((6)) Anticipated run rate of targeted efficiency savings (on a net basis)

((7)) March 2023 Ofwat numbers

 

 

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