Japanese owner SES Water is paying a £7.8m dividend and putting the business up for sale as the UK’s private water company comes under pressure to invest in aging infrastructure.
The company, which supplies water to around 745,000 people in south-east London, West Sussex and Kent, has been put on the market by owners Sumitomo and Osaka Gas, according to two sources close to the sale process. Macquarie Capital acted as the company’s advisor.
SES’s Japanese owners are understood not to want to put equity in the business and instead decided to sell it, people close to the discussions said. The company is one of only six water suppliers in the UK and is responsible for supplying Gatwick airport, which was forced to close its restaurants and toilets for a day last July after a pipe burst.
Wastewater treatment in the area is provided by Thames Water and Southern Water, which could be potential buyers.
The sale comes as private water and sewage companies in England and Wales face the biggest wave of protests since privatization 33 years ago. These companies have been accused of water leaks and massive pollution failures, including dumping unknown amounts of water and waste into coastal waters and rivers.
About a fifth of the water treated throughout the industry is lost to leaks while only 14 percent of rivers meet the minimum standards for “good” ecological status, according to official figures.
However, even as water companies come under pressure to invest in infrastructure, regulator Ofwat is increasingly concerned about companies’ balance sheets. After being sold almost debt-free in privatization three decades ago, the company has amassed £60.6bn in loans, diverting income from customer bills to pay interest.
In December, Ofwat said the SES needed to strengthen its “financial resilience” along with Southern Water, Thames Water, Yorkshire Water and Portsmouth Water.
Like other water companies, SES is under pressure from rising energy, chemical and labor costs, as well as the cost of servicing £211m of net debt.
Last year, the company said its net funding costs would almost triple from £5.5 million in 2021 to £14.3 million in the six months to the end of September 2022. Despite this, SES paid out a dividend of £7.8 million in the year to March 2023. .
Water and sewage companies are regional monopolies so the prices they can charge customers are set every five years by Ofwat and are allowed to rise with inflation. In April, the average household bill will rise by 7.5 per cent – increasing the average bill by £31 to £448 a year.
However, Philip Cope, an analyst at the rating agency Moody’s, said that in many cases, the increase in profits is not enough to offset the pressure of rising costs such as energy, which many companies have not yet fully covered, or bought in advance, beyond this year.
Last month, Moody’s downgraded the UK’s water industry outlook from ‘stable’ to ‘negative’ due to “ongoing regulatory and affordability pressures as well as a volatile macroeconomic environment.” More than 50 percent of the debt held by water companies is linked to inflation by March 2022, Moody’s said.
At 72 percent SES’s regulatory gearing – the size of debt – is high, although lower than Thames Water, which has 80.6 percent, according to Ofwat.
SES, Macquarie Capital, Thames Water and Southern Water declined to comment. Sumitomo and Osaka Gas did not respond to requests for comment.