Retail divisions at SSE and Innogy to merge in Big Six battle for market dominance with Scottish-British Gas rival

Perth-based utility SSE is to merge its retail gas and electricity supply business with the counterpart division from Innogy in a battle with a Big Six rival for market dominance.

The as-yet un-named new firm is expected to be roughly the size of market leader Centrica plc – which owns the ‘Scottish’ and ‘British’ gas supply business and which has some 11.5 million customers.

The announcement comes less than a month after the government published draft legislation to lower the cost of energy bills by imposing a price-cap on fuel prices. SSE Retail’s chief operating officer, Tony Keeling, denied that was the reason for the merger.

SSE, the UK’s second-largest energy supplier, also reported a big fall of 13.9% to £409.6 million in its adjusted pre-tax profits in the six months to September 2017 compared to last year.

Alistair Phillips-Davies, SSE chief executive, said: “The energy market’s changing rapidly and we need to do things differently. Our merger with Innogy will result in a new, British, independent energy supply company.

“The scale of change in the energy market means we believe a separation of our household energy and services business and the proposed merger with npower will enable both entities to focus more acutely on pursuing their own dedicated strategies, and will ultimately better serve customers, employees and other stakeholders.”

Subject to shareholder and regulatory approvals, SSE plc will remain a group of related businesses, specialising in the energy, infrastructure and services.

The separate new SSE-Innogy Retail Company will apply for a premium listing on the main market of the London Stock Exchange. Innogy intends to retain all of its 34.4% holding in the combined Retail Company for at least six months from the new listing.

The chairman-designate, chief executive-designate and finance director-designate will be appointed jointly by SSE and Innogy.

Although no decisions have been made at this stage, significant synergies are anticipated from operational cost efficiencies and capital expenditure savings from a combined IT platform. These savings are expected to ultimately enable the company to be an efficient competitor in its markets, competing more effectively and contributing to lower costs for customers.

To the extent that any anticipated synergies result in implications for employees, no final decisions will be taken before any required consultation with employee representative bodies has taken place.

The estimated size of the two businesses to be combined is:

  • npower: at 31 December 2016, value of segment gross assets of £2,128m (net of goodwill of £1,773m) and operating loss attributable to the business of £89.5m;
  • SSE Retail: at 31 March 2017, estimated value of gross assets of £819m (excludes cash) and estimated profit before tax attributable to the business of £267m (excludes historical inter-company debt interest).

Philips-Davies added: “The standalone retail business will benefit from its own dedicated board of directors and specialist management team, supported by skilled employees and focused entirely on strategic and operational developments in the GB retail sector, including the competitive and regulatory environment.

“It will also have the ability to access and allocate its own capital, allowing day-to-day decision-making to be more closely aligned with strategy and thereby facilitating the delivery of greater benefits to all stakeholders going forward, including customers and employees.”

Professor David Elmes, Head of the Global Energy Research Network at Warwick Business School, commented: “nPower (which owns Innogy) has certainly struggled in recent years.

“It lost over £100 million in 2015 and lost over 350,000 customers that year and ended up being fined £26 million by the regulator, OFGEM, because of slip-ups in implementing a new billing system which led to inaccurate bills and slow replies to complaints. 

“With that history, it’s not surprising that nPower has looked at selling up and leaving the retail market.

“Being an energy supply company in the UK has become a tough business to be in and so it’s not too surprising that some companies are taking the decision to exit the market.”

Robert Buckley, Research Director at Cornwall Energy, added: “The new company is far from a done deal and will almost certainly face scrutiny from the Competition and Markets Authority (CMA). Review thresholds for the CMA are a 25% market share in the UK (or substantial part of), or a turnover of £70mn.

“The proposed merger would comfortably meet the turnover requirement and exceeds 25% electricity market share in the six home regions of the two suppliers.

“Indeed, this merger would create the largest GB electricity supplier, exceeding the approximately 22% market share of British Gas.  Regionally, it would hold an energy supply market share in excess of 25% in the Southern, South West, and North Scotland regions, exceeding 50% in the latter, sitting behind British Gas nationally.

“Competition arguments will be a significant barrier. However, the announcement would not have arrived without thorough consideration. The two companies would likely argue that the scale the move affords would allow it to compete effectively with Centrica and that the move would not impact the growth of small and medium suppliers (SaMS).

“Furthermore, the new company would be standalone and therefore no longer vertically integrated – something that many SaMS have been calling for years”.

9 Nov 2017

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