Wessex Water could be forced by the regulator, Ofwat, to slash prices by 15 per cent or more if its proposed takeover of South West Water announced yesterday goes ahead. The merger would be the first among the 10 main water and sewage companies and according to some City analysts could result in the loss of about 250 jobs.
The consensus is that a bid by Wessex could succeed at between 600p and 640p per share, valuing South West at up to pounds 800m. However, the proposed offer will automatically be referred to the Monopolies and Mergers Commission and no price will be put forward until the regulatory hurdles have been cleared. There were mixed views in the City as to whether a white knight would emerge.
Shares in South West Water surged by 70p to 608p while Wessex dropped 20p to 324p. South West Water said only that the approach was unsolicited and that shareholders should take no action.
Ofwat declined to comment on the plans. However Ian Byatt, the director general, has always made it clear that takeovers within the industry should be accompanied by significant price cuts for consumers to offset the reduction in the number of companies between which he can make comparisons. He believes that the number of comparators is a key element in his ability to regulate effectively.
Mr Byatt exacted a guarantee of a 15 per cent reduction in bills in the recent takeover of Northumbrian Water by Lyonnaise des Eaux of France and has a reputation for becoming tougher with each bid that occurs. He is also likely to demand strict ring-fencing of the core water and sewage businesses from the rest of the enlarged groups activities, including the substantial waste management arms.
A spokeswoman for Ofwat said: "As groups get bigger the water business need to be safeguarded." Wessex said that it had already held discussions with Mr Byatt on regulatory concerns.
Wessex and South West are among the smallest of the 10 privatised companies. Wessex supplies water to 1.1 million people and sewage services to 2.5 million, while South West provides both services to 1.5 million customers in a neighbouring area.
South West is seen as vulnerable because of management upheavals. Bill Fraser, the managing director, retired last month and Keith Court, the executive chairman, stands down in April. The perception of the company has also been badly damaged by adverse publicity over water quality and service standards.
Colin Skellett. chief executive of Wessex Water, said: "We believe there is a compelling geographical and commercial rationale to our proposed offer. We further believe that the combination of South West Water and Wessex can better and more rapidly address the service issues South West Water faces."
However, he added: "We are not hell bent on taking them over - we will do it only if we get a good price and a good regulatory package. This is not some management ego trip."
The acquisitions would enhance Wessex's earnings in the first full year following acquisition and thereafter. Mr Skellett added: "It gives us scope to grow dividends faster in future."