FTSE 100 water utility company Pennon Group PLC (GB:PNN) announced the acquisition of Sutton and East Surrey Water PLC (SES water) in a deal valued at £380 million. The acquisition comes at a time when Pennon and other water companies are facing criticism over pollution issues and increased scrutiny from Britain’s water regulator Ofwat.
More on the SES Water Deal
Under the agreement between the two companies, Pennon will acquire the holding company of SES Water and other ancillary businesses from its Japanese owner, Sumitomo Corporation and Osaka Gas. The deal involves paying £89 million for SES Water’s equity while assuming £291 million in debts.
Pennon expects the deal to boost its scale in the South of England through the addition of around 745,000 customers.
It is worth noting that in October 2023, Ofwat called SES Water one of the worst-performing water companies in the UK and urged it to turn around its financial position.
Along with the deal, Pennon announced its intention to raise equity worth £180 million to bring down the combined company’s leverage. In particular, Pennon aims to use the proceeds from this issue to maintain the group’s gearing range (a ratio that measures a company’s financial leverage) between 55% to 65%.
Pennon, Water Companies Face Increased Scrutiny
Last year, Ofwat reprimanded water companies for paying dividends without considering their dismal financial performance and rising debt levels. The regulator also criticized water companies for leakage and water pollution. In fact, South West Water, which is owned by Pennon, was fined £2.1 million for pollution offences. It is also facing an investigation related to the accuracy of information disclosed about water leakage and consumption.
Despite the backlash, in November 2023, Pennon announced an 8.3% hike in its interim dividend per share to 14.04p. The company boosted its dividend even as its underlying profit before tax for the first half of Fiscal 2023 declined nearly 60% year-over-year to £9.1 million.
Under these circumstances, AJ Bell investment director Russ Mould thinks that Pennon’s acquisition of SES Water “may raise eyebrows,” given that the company needs to invest in its old infrastructure and address sewage discharge issues.
Are Pennon Shares a Good Buy?
Analysts are cautiously optimistic about Pennon stock, with a Moderate Buy consensus rating based on three Buys and five Holds. The average Pennon Group PLC share price target of 858.29p implies nearly 14% upside potential. Pennon’s share price has declined nearly 20% over the past year.
