Pennon Group mulls acquisitions after Viridor windfall

South West Water owner Pennon Group says it is considering utilising the proceeds from the sale of recycling business Viridor to target acquisition opportunities. In a trading statement, Pennon said it was reviewing reinvesting the Viridor proceeds in potential growth opportunities in the UK's water sector.

If an acquisition is not made, the company said it would make a “substantial return of capital to shareholders.” Pennon said it would seek to clarify this by the time of its full-year results on June 3.

The sale of Viridor to private equity firm KKR last year generated £3.7 billion in net cash proceeds for Pennon. The group used £1 billion to de-gear, leaving it with a “sustainable” £200 million in gross debt. As of today, the company says it has expected cash and facilities “well in excess of £3 billion.”

Regarding its plans, the company said: “Pennon believes there is significant value potential from the reinvestment of the Viridor sale proceeds in the UK water sector and continues to narrow down its review of potential growth opportunities.”

“In the event a major value accretive investment opportunity is not available, Pennon expects to make a substantial return of capital to shareholders.”

Reports have indicated that a likely acquisition target is Southern Water, which Pennon was reportedly mulling a bid for in late 2020. Southern Water has struggled in recent years with high debts and regulatory investigations, with the company being hit with a record £126 million fine from water regulator Ofwat in 2019.

Regarding Pennon’s potential acquisition plans, Steve Clayton of Hargreaves Lansdown commented: “Today's statement is reassuring but necessarily fails to provide full clarity on how Pennon will go about reinvesting the Viridor proceeds. But it looks as though whilst Pennon have not signed a deal yet, they may be reaching for the pen.”

“The group say that by their full-year results on June 3 they will either have announced a deal to acquire another UK water company, and Southern Water is the name most often linked here, or they will make a substantial return of capital to their investors.”

“In an uncertain world, Pennon looks attractive. Either the most effective management team in the sector will get a major new set of assets to work with, or there will be an upfront cash return. Either way, Pennon looks set to have a busy summer ahead.”


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