Bournemouth Water and South West Water’s parent company Pennon Group has approved the sale of Viridor amounting to a £4.2-billion deal.
Viridor is a waste management business and will be sold to Planets UK Bidco Limited. The deal is set to be closed in summer 2020 following its approval by the EU Merger Regulations last 8th May.
About 99.85% of Pennon shareholders, or 300,163,886 votes, were in favour of selling the waste arm of the parent company. The remaining condition relates to certain obligations and guarantees that Pennon is set to provide for Viridor’s sake.
The firm will be announcing the completion of the sale as soon as it receives the £3.7-billion net cash earnings.
Pennon announced in March that it was selling Viridor to Plants UK Bidco, which is a newly-formed firm. This new company is advised by Kohlberg Kravis Roberts & Co L.P.. The latter previously bid for Viridor in 2019 but was turned down.
Pennon is allegedly planning its succeeding acquisition related to water or wastewater services once the Viridor sale finalises.
The £3.7-billion cash proceeds will be used to reduce pension deficit and company borrowings. The firm also eyes return for shareholders while some of the funds will be allocated for future endeavours of the company.
Analysts reckon there will be around £2.5 billion as war chest of the company following the necessary deductions. Pennon’s potential target could be Northumbrian Water, which is considered to be a transformative deal should CKI, the parent company, agree to a deal.
The firm acknowledged that opportunities for investment outside the UK were not plentiful. It also ruled out further expansion beyond the wastewater and water segment.
Completing the sale of Viridor could mean that the company drops out of FTSE 100, with its value poised to be at £2.4 billion after the deal. Analysts cite that it’s a valid reason for the company to consider a more significant acquisition soon.
Chris Loughlin, CEO of Pennon, said that the company continued to seek opportunities for business expansion, especially after the Bournemouth Water acquisition in 2016.
Loughlin stated the technology and systems in the Exeter headquarter has been running Bournemouth Water. It shows that any acquisition in the future will not be limited by geographical location.
Susan Davy, Pennon CFO, believes that consolidation, like that of Bournemouth Water, provides benefits to customers and companies in the region. In the case of Bournemouth, these benefits comprise two innovative wastewater treatment plants. It would not have come to fruition if not for the acquisition.
Despite the coronavirus-related lockdown, Pennon maintained that performance in all its business parts had met expectations.
Before the Viridor sale, the company reported liquidity of £1.6 billion into its new investment cycle. It has helped the company weather the uncertainties of the recent crisis.
The firm reportedly did not experience a real impact relating to expenditure during this pandemic. Its expected credit losses for Pennon Water Services amounts to £9 million, while expected losses or South West Water and Viridor are £5 million and £1 million, respectively.
Household water usage rose about five to eight percent, shifting the demand due to the lockdown. The non-household market saw a complementary reduction of around 20%, which will likely pick up as restrictions are gradually eased.
Loughlin stated that the company’s water arm did not see the need to use Ofwat and MOSL’s support mechanisms for wholesalers and retailers. He further expressed his hope that the regulators will ensure resiliency and strength for the water sector. He said that the special support mechanisms should also reflect long-term implications.
Pennon decided to provide a full salary for its staff regardless of how the situation would unfold, not relying on the support schemes. Loughlin further added that since the company has good liquidity, they felt that it was inappropriate to use the support schemes offered.