Continuing troubles at Severn Trent

June 7, 2007 at 10:20 am

Severn Trent, the FTSE 100 company that provides drinking water to 8 million people in the midlands, released its full year results this week. Profits were up 9 per cent as it has successfully completed the demerger of its waste collection business Biffa. Chief executive officer Colin Matthews commented, “With the restructuring of the group complete, management is committed to the single-minded pursuit of continuous improvement in Severn Trent Water.” These improvements include cutting up to 600 jobs, with the first 130 going this year, the first of which will be the man who made the statement. After only two years in charge, Matthews makes way for Tony Wray, currently head of water at Severn Trent.

Matthews’ departure reflects the fact that the company hasn’t made any significant progress in addressing the manifold problems the company has been experiencing. The company already faces a fine from Ofwat, the UK’s water regulatory body, for poor standards of customer service. Although the annual results contains no definite announcement regarding leakage data, industry analysts expect it will have exceeded Ofwat’s maximum daily allowance of leakage, 525 mega litres per day, the amount needed to fill 218 Olympic sized swimming pools. The total fine expected to be levied on the company by Ofwat is around £50 million. This comes is despite the fact that the company has devoted £20 million to patching leakages. This investment has only been coming to fruition since the spring, and since Ofwat calculates leakage data on a financial yearly average, its 2005/2006 data will not benefit from any improvements currently being made.

The water sector is currently in vogue within the city, with bids expected to materialise from private equity for at least one of the major suppliers. Investors are attracted by the predictable returns and relatively high margins available in the sector. Last year Thames Water was sold to Australian private equity infrastructure investor group Macquerie, AWG was sold to private equity newcomers CPP, and recently Southern Water has been put up for sale by its parent Royal Bank of Scotland. Yorkshire Water parent Kelda Group is also rumoured to a prospective bid target. If a bid materialises for Kelda or Severn Trent, it will have to come from outside the sector to stand a chance of succeeding, as consolidation has already taken place to a large extent, and Ofwat will be concerned about the prospects of a monopoly emerging. Last month, a study by broker KPMG revealed that 2 out of 3 British utility companies are on the hunt for acquisitions. Ofwat has publicly stated its opposition to further consolidation, as they believe it could lead to exploitative pricing policies.

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