Pennon Group PLC (LSE:PNN, OTC:PEGRY)’s takeover of Sutton and East Surrey Water is “compelling” given the attractive premium paid for the supplier, UBS analysts have said.
South West Water-owner Pennon announced the £89 million acquisition on Wednesday, which combined with SES’s net debt saw a total enterprise value of £380 million.
The resultant roughly 6% premium paid by Pennon for the water-only supplier was dubbed “cheap by historic standards” by UBS.
This is in comparison to Pennon’s 2021 acquisition of Bristol Water, where a roughly 44% premium was paid, the bank noted.
Pennon’s coinciding £180 million capital raise, where shares were placed at 730p each, marked a 1% premium based on the supplier’s regulatory asset base value.
“We view this alone as making the deal attractive,” analysts said, forecasting Pennon’s debt gearing to remain around the 55% mark following the deal.
Adding the takeover would be “marginally dilutive” to per share earnings, UBS forecast an 8.5% rise in pre-tax earnings and 7.1% jump for Pennon in regulatory asset base value by 2026.
“We expect the attraction for Ofwat and consumers is the potential for [SES to] turnaround under Pennon ownership.”
“Sutton and East Surrey Water is a regulated water only supplier, hence does not have exposure to sewerage or storm overflows,” UBS added, meaning the firm will be shielded from fines and stricter rules on infrastructure upgrades.
UBS reiterated backing for Pennon's stock follwoing the deal, alongside a share price target of 890p - up 18% of Wednesday's close.