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SSE calls off Npower merger amid worries about price cap and competition

Last updated: 13:00 17 Dec 2018 GMT, First published: 07:35 17 Dec 2018 GMT

SSE
The CMA had cleared the deal in October

SSE plc (LON:SSE) has abandoned a proposed merger of its energy services business with Npower, saying it is no longer in the best interests of its customers, employees or shareholders.

The FTSE 100 firm is now considering other options for the unit, including splitting it off and listing it on the London Stock Exchange (LSE), a sale or alternative transaction. SSE believes the division would be “best positioned” outside the group.

READ: SSE PLC's planned merger of retail unit with Npower cleared by UK regulator

The company said while it “believed strongly” in the merger’s potential to deliver benefits for customers and the wider market, it no longer thinks it would be in a position to meet trading collateral requirements or to be capable of listing on the premium segment and main market of the LSE.

Tough competition and regulatory clampdown hits energy suppliers

The decision to ditch the deal comes as the two businesses have struggled amid uncertainty surrounding the government’s cap on energy bills and tough competition in the market.

SSE said the energy services division is still expected to be profitable and cash flow positive in fiscal years 2018/19 and 2019/20.

"This was a complex transaction with many moving parts,” said SSE chief executive Alistair Phillips-Davies.

“We closely monitored the impact of all developments and continually reviewed whether this remained the right deal to do for our customers, our employees and our shareholders. Ultimately, we have now concluded that it is not.   This was not an easy decision to make, but we believe it is the right one.”

Doubts ahead of calling off deal

The news comes two months after the Competition and Markets Authority cleared the deal.

However, last month the companies said the tie-up would be delayed beyond the first quarter of 2019 due to market developments such as the looming implementation of a price cap by UK energy regulator Ofgem from January 1.

Shortly after that announcement, SSE reported a 41% drop in adjusted pre-tax profits to £246.4mln for the six months to September 30, down from £416.7mln a year earlier, after a heatwave led to lower volumes of energy being consumed.

At the time, it also flagged up that it was looking to create a new company that will include its renewable energy assets in the UK and Ireland.

The new company - to be known as SSE Renewables - will comprise around 4 gigawatts of SSE's existing renewable assets such as hydropower, onshore wind and several stakes in offshore wind projects.

READ: SSE investors reassured by dividend hike but rocky road continues as it attempts to shelter earnings from vagaries of regulator and weather

A merger of SSE and Npower would have created Britain's second-largest retail power provider and reduced the ‘Big Six’ energy suppliers dominating the market to just five companies.

Merger 'complicated from the start', says analyst

“SSE’s retail merger plan with Npower looked complicated from the start and it’s perhaps no surprise that the deal is off," said Russ Mould, investment director at AJ Bell.

“The big utility companies are under pressure from an incoming price cap on standard variable tariffs, as well as rising competition from independent operators who are gobbling up market share."

He added that the increasing ease with which people can switch providers has also contributed to the mass exodus of consumers from the big utility firms.

However, Mould noted that eight small energy providers have stopped trading this year, "potentially switching consumers’ focus back to the larger utilities as the public starts to question if small suppliers can deliver uninterrupted energy".

Shares in SSE fell 2.5% to 1,061p in afternoon trading. 

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