ScottishPower stunned investors yesterday by selling off its Southern Water arm for £2bn and announcing plans to slash the dividend from next year.
Shares in the company initially fell more than 10 per cent but later recovered slightly to close 7 per cent down at 382.5p – a fall of 27.25p on the day.
The purchaser of Southern Water is First Aqua, a specially created company backed by debt finance from Royal Bank of Scotland and equity funding from a group of private and institutional investors. Aqua is in negotiations to sell the business on to the French conglomerate Vivendi Environnement, which already owns several UK water companies.
ScottishPower said that following the sale it intended to adjust its dividend policy in a move which analysts estimated would reduce the payout by about 30 per cent from March 2003 onwards.
Ian Russell, ScottishPower's chief executive, said: "This is tough but necessary if our dividend policy is to reflect the business we have become and the strategy for the future."
The sale of Southern Water is a reversal of previous policy. Last November, Scottish-Power said that it had decided to refinance the business with debt after failing to find a buyer. The refinancing would have freed up £1.7bn to invest elsewhere in the group. Vivendi was one of the potential buyers with which ScottishPower held abortive sale negotiations
Mr Russell said the sale of the business to Aqua had "low regulatory risk" because it was dependent only on being cleared by competition authorities in Brussels and not the water regulator Ofwat or the UK's Office of Fair Trading.
Should Southern Water then be sold on to Vivendi, the deal would face an automatic nine-month referral to the Competition Commission because of the French group's existing ownership of Three Valleys Water, Folkestone and Dover water and Tendring Hundred Water.
Under the terms of a put and call option deal with Aqua, Vivendi has the right to buy a non-voting stake of just under 20 per cent in Southern Water. But it confirmed yesterday that it may buy the company off Aqua for the same price as it is paying ScottishPower.
The institutions behind Aqua, which are, in effect, acting as middlemen in the transaction, stand to earn fees running into tens of millions of pounds.
RBS is putting up around 80 per cent of the purchase price in debt with the remaining 20 per cent being financed through equity. Among the equity investors are Citigroup and West Coast Capital, a privately owned Scottish investment company run by Jim McMahon. Its directors include the former Conservative MP Anthony Nelson and the City financier Richard Edgecliffe-Johnson.
Southern Water is one of the UK's biggest water suppliers with 1.7 million customers in south east England and operating profits last year of £221m on turnover of £421m.
The proceeds from the sale will reduce ScottishPower's borrowings as a proportion of shareholders funds from 112 per cent to 81 per cent. But ScottishPower, which bought Southern Water for £1.8bn in 1996, will book a £450m loss on the sale and will also take a £740m goodwill charge in its accounts.
The change in dividend policy will result in the payout being covered 1.5 to 2 times by earnings compared with 1.2 times at present.