What's Next for British Power Suppliers After Collapse of Merger

(Bloomberg) -- Three of Europe’s largest power suppliers will need to draw up new strategies after the collapse of a deal to merge the retail units of SSE Plc and Innogy SE operating in the U.K.

Combining the two would have been an ambitious task. The outlook darkened with laws limiting the bills consumers pay for electricity and natural gas, leaving utilities that once delivered stable profits and dividends struggling to break even. Add to that stiffening competition that’s draining customers from the Big Six energy suppliers, and the SSE-Innogy deal was untenable, with Jefferies International Ltd. calling it a “shambles” last month.

Scrapping what would have been the nation’s second biggest retail energy supplier shows “just how hard it is to run a viable retail energy business in the U.K.,” said David Elmes, a professor at the Warwick Business School. Both companies found it “challenging, and this was a move to combine their customer businesses and hopefully make a new firm that would be more successful.”

What's Next for British Power Suppliers After Collapse of Merger

Here we look at some of the options open to the companies as they move forward:

SSE

SSE says that the retail unit, which had 6.5 million customers by the end of September, will be profitable both this year and next. But Chief Executive Officer Alistair Phillips-Davies struck a downbeat and cautious tone in a call with reporters on Monday, emphasizing the need for his management team to sound out major shareholders. He insisted a separate listing of the unit was still very much an option. Another may be a sale or another merger.

However, Deepa Venkateswaran, an analyst at Sanford C Bernstein Ltd., said the unit may be too small to pursue and independent listing. And there’s no sign of any deal emerging quickly.

“We want to take our time, and see what’s available to us,” Phillips-Davies said. Floating the unit is “a viable option.”

Elchin Mammadov, an analyst at Bloomberg Intelligence, said SSE may “sell the business to an oil major or a foreign utility” such as Fortum OYJ of Finland. “Alternatively, SSE could merge its supply business with another U.K. energy retailer. The most likely scenario would be for SSE be to spin off and list its retail division as a standalone entity. Yet that would be the worst option, in our opinion, given the unit’s small size.”

Innogy

Innogy is likely to have a harder time in offloading its Npower unit, its U.K. retail unit. The division has been bleeding money and customers for years. It’s beset by billing issues caused by faulty computer systems. And for an eighth year, it was rated at the bottom in terms of customer satisfaction in a survey of energy suppliers by Which.

With about 4.4 million customers at the end of June, Npower could be merged into another company integrated with EON’s U.K. retail business or sold off piecemeal, according to DZ Bank AG.

“We are looking at all considerable options,” said Vera Buecker, spokeswoman for Innogy. “There are options. We cannot say if they are good, because now we need to do an in depth analysis.”

The deal’s collapse prompted Innogy on Monday to warn that profit would be 250 million euros ($283 million) lower than expected next year as it absorbs the unprofitable company in its own accounts.

“We believe these losses are larger than previously anticipated by the market,” said John Musk, analyst at RBC Europe Ltd.

What's Next for British Power Suppliers After Collapse of Merger

EON

The decision will also impact the much bigger deal between EON SE and RWE AG. Unless Npower is sold separately, EON is likely to have to absorb the company and spend “several painful years to re-structure and integrate it,” according to Jefferies International Ltd.

Although EON welcomed the originally planned Innogy and SSE transaction, it was never a condition of the company’s agreement with RWE. If SSE never made a deal with Innogy to take on Npower, it would have been EON absorbing the unit as part of the broader transaction it had with RWE. So now there’s a possibility the companies go back to that default option since SSE has left the table.

The 250 million-euro loss for Innogy is equivalent to about 5 percent of enlarged EON’s earnings in 2020 and about 10 percent of its earnings per share, according to RBC.

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